PURE ECONOMICS
PUKE ECONOMICS
BY
PKOFESSOR MAFFEO PANTALEONI
TRANSLATED BY
T. BOSTON BEUCE, ESQ.
OF THE MIDDLE TEMPLE ; BARRISTER- AT-LAW
N
iLontion
MACMILLAN AND CO., LIMITED
NEW YORK : THE MACMILLAN COMPANY
1898
All rights reserved
H6
TEANSLATOR'S PEEFACE
PROFESSOR PANTALEONI'S Manuale di Economia Pura has met
with general acceptance at the hands of Italian students of
economics. It has been translated in the hope that it may
meet, on the part of English readers, with the recognition to
which its comprehensive grasp and lucid exposition of the
fundamental principles underlying economic questions entitle it.
The English edition embodies additions and alterations by
the author, necessitated by the contributions that have been
made to this subject by many writers since the original
Italian edition appeared in 1889.
The translator desires to acknowledge the kindness and
courtesy of Professor A. Marshall of Cambridge in giving him
access to some of his unpublished writings, to which reference
is made in the text.
T. B. B.
PEEFACE
THIS manual is intended as a succinct statement of the
fundamental definitions, theorems and classifications that
constitute economic science, properly so called, or Pure
Economics. Thus all questions pertaining to economic art,
or Political Economy, are beyond its scope. This is a
departure from the lines on which text-books of economic
science are usually prepared, their authors' object being to
equip the reader forthwith for the discussion of the most
important economic problems presented by everyday life.
The reasons of this departure are twofold. In the first place,
it appears to me that the discussion of problems of economic
art is altogether superficial and inconclusive, if not based
ultimately on theorems of Pure Economics. In the second
place, I do not share the view that Pure Economics is not
susceptible of plain exposition, requiring no greater intellectual
effort for its comprehension than many other branches of study
that form part of a university curriculum. ; My experience in
the class-room has convinced me that all that is necessary on
the part of the lecturer is that he should enunciate his pro-
positions in a rigorously logical order of sequence, explain and
illustrate their contents and bearing with copious detail, and
enhance the mnemonic effect of his prelection by occasionally
repeating the same things in a different form.
In yet another point I have departed from the general
practice of text-writers. To each theorem and each classifica-
tion I have given the name of the economist to whom we are
viii PREFACE
chiefly indebted for it. The selection of these names was a
matter of some difficulty, in view of the conflicting claims that
may be advanced on behalf of the economist who first dis-
covered a theorem, or the one who first analysed it minutely,
or who co-ordinated it with other theorems, or who popularised
it, or rediscovered it after it had been forgotten. The principle
on which I have proceeded is to mention the author whom
the student may consult with most profit to himself. This
method facilitates the recollection of theorems, conduces to
the study of the sources, and presents a small repertory of the
latter methodically classified.
MAFFEO PANTALEONI.
CONTENTS
PAGE
TRANSLATOR'S PREFACE v
PREFACE vii
PAET I. — THE THEOKY OF UTILITY
CHAPTER I
OF THE SUBJECT-MATTER OF ECONOMIC SCIENCE ... 3
CHAPTER II
OF THE HEDONIC PRINCIPLE
§ 1. Meaning of the Hedonic Principle and its Correspondence with the
Psychological Reality ......... 9
§ 2. Of the Principle of the Relativity of Sensations of Pleasure and Pain 17
§ 3. Of Individual and Tribal Egoism 20
§ 4. Of the Commensurability of Pleasures and Pains .... 23
§ 5. Of the Fundamental Law of our Sensibility 28
§ 6. Gossen's Two Theorems of the Hedonic Maxima .... 31
CHAPTER III
OF WANTS
§ 1. That Economic Actions are such as are caused by the Existence of a
Want 39
§ 2. Of Hedonic Mensuration applied to the various Degrees of Intensity
of a single Want, and to the Comparison of the Degrees of Intensity
of Simultaneous Wants . 40
x PURE ECONOMICS
PAGE
§ 3. Of an Absolute Scale of Intensity and of the Law of the Elasticity of
Wants 48
§ 4. Of the Variety and Progression of Wants 55
§ 5. Of some Classifications of Wants in respect of their Qualities . . 56
CHAPTER IV
OF UTILITY AND THE CLASSIFICATION OF COMMODITIES
§ 1. How Commodities are commonly Characterised .... 58
§2. Of the Essentials of the Conception "Commodity" . ... 60
§ 3. Of the Degree of Utility and of the Total Utility of Commodities ;
of the Initial Degree of Utility of one or more Commodities, and
of the Final Degree of Utility 70
§ 4. Of Positive and Negative Utility, and the Division of Things into
Positive and Negative Commodities . . . . . . 79
§ 5. Of Direct, Complementary, and Instrumental Utility according to
Gosseii, and of a corresponding Division of Commodities into
Direct, Complementary, and Instrumental 81
§ 6. Of Actual and Prospective Utility, and of an Analogous Classification
of Things as Actual and Prospective Commodities ... 86
§ 7. Of Economic Equivalents and of Genetic Groups of Commodities . 93
§ 8. Jennings's Classification of Commodities as Primary and Secondary,
and Laws based thereon ........ 94
§ 9. Of Commodities, the Available Quantity of which is more or less
than the Demand 96
§ 10. Of Cost 101
CHAPTER V
OF WEALTH AND THE METHODS OF ESTIMATING IT
§ 1. Wherein the Wealth of Individuals consists ; how it is estimated ;
and why it is no Criterion of their Comfort . . . . .110
§ 2. Of the Wealth of a Group of Individuals, or of a Nation, considered
at a given Time and Place 112
§ 3. Of the Difficulty of Comparing the Wealth of two or more Indi-
viduals, or of two Nations at a given Period . . . .115
§ 4. Of the Difficulty of Comparing the Wealth possessed at different
Times or Places by two or more Persons or by two Nations . . 117
CONTENTS
PART II. — THE THEORY OF VALUE
CHAPTER I
OF VALUE ; HOW DEFINED ; ITS CAUSES AND WITHIN WHAT
LIMITS IT is ARBITRARY
PAGE
§ 1. Definition of Value 123
§ 2. Various Uses of the Term " Value " ...... 128
§ 3. Of the Causes of Value, or the Conditions of every Exchange . . 129
§ 4. Of the Maximum and Minimum Limits of Value in Isolated Eco-
nomics and in the Economics of Exchange 137
CHAPTEE II
DETERMINATION OF THE RATE OF INTERCHANGE IN THE RESPECTIVE
CASES OF MONOPOLY AND OF FREE COMPETITION
1. Determination of the Rate of Interchange of Monopolised Com-
modities and Distribution of the Latter amongst Competitors . 147
2. Determination of the Rate of Interchange of a Commodity exchanged
under Conditions of Free Competition, and of the Distribution of
the Mass sold among the Competitors 159
CHAPTER III
THE LAW OF DEMAND AND SUPPLY
1. Of the Remote Factors that determine the Curve of Degrees of
Utility and the Disposable Quantity of a Commodity . . .164
2. Of the Identity of the Cost of Production and Final Degree of Utility
of Commodities and of some of the Principal Deductions from this
Theorem 170
3. Of an Erroneous Meaning attributed to Cost of Production, and of
some consequent Erroneous Propositions 179
4. That the Value of Commodities consumed in the Production of another
Commodity cannot be the cause of its Value. Wieser's Law . . 181
5. That Cost and its Remuneration are Antithetical Conceptions . . 185
6. Of the Law of Variation in the Productiveness of Cost . . . 186
PURE ECONOMICS
PAGE
Of the Influence of Cost on the Rate of Interchange under Conditions
of Free Competition. Theorems of Ricardo and Marshall. Stable
and Unstable Equilibrium of the Quantitative Index . . .188
Of the Reciprocal Demand between Close Markets. Professor Mar-
shall's Proposition respecting the Forms of Reciprocal Demand
Curves and the Stable and Unstable Equilibria they constitute : —
A. Laws of the Curves of Reciprocal Demand . . .197
B. Theory of the Stable and Unstable Equilibria of the Rates
of Interchange ........ 205
PART III. — APPLICATION OF THE GENERAL THEORY OF
VALUE TO DETERMINATE CATEGORIES OF COMMODITIES
CHAPTER I
OF THE UTILITY AND VALUE OF INSTRUMENTAL COMMODITIES
IN GENERAL, AND OF THE GENERAL PRINCIPLES OF THE
DISTRIBUTION OF WEALTH 213
CHAPTER II
OF THE VALUE OF MONEY
§ 1. Money an Instrument of Exchanges ...... 221
§ 2. Money a Common Denominator of Values 224
§ 3. Of other Contingent Functions of Money 225
§ 4. Of the Value of Money 227
§ 5. That Money may be a Commodity destitute of all direct Utility . 231
§ 6. Of Gresham's Law 233
§ 7. Of the International Distribution of Money 233
§ 8. Of Discount in Relation to the Value of Money .... 235
§ 9. Of the Cost of Metallic Money 238
§ 10. Of the Value of Instruments of Credit functioning as Money . . 239
CHAPTER III
OF THE VALUE OF CAPITAL
§ 1. Definition of Capital and Interest 243
§ 2. Capital— A Complementary- Instrumental Commodity . . . 248
§ 3. That the Origin of Interest is not the Difference between the Value
of Present and Prospective Commodities . . . . .252
CONTENTS xiii
PAGE
§ 4. Of the Factors that Determine the Kate of Interest .... 255
§ 5. Of the Capitalisation and Uniformity of the Rate of Interest among
Open Markets 259
§ 6. Of the Tendency of the Rate of Interest to Stability . . .261
§ 7. Of Interest in connection with the Value of Money and Discount . 262
CHAPTER IV
OF THE VALUE OF NATURAL AGENTS
§ 1. Of the Value of Land 264
§ 2. The Statical Theory of Ricardo's Law of Rent 265
§ 3. The Dynamic Theory of Ricardo's Law of Rent . . . 275
§ 4. Historic Theory of Ricardo's Law of Rent 277
§ 5. Of Profits as Rent— Mr. F. Walker's Theory 278
CHAPTER V
OP THE VALUE OF LABOUR
§ 1. The Premisses of the Theory of Wages 284
§ 2. Determination of the Rate of Wages in Isolated Economics . . 287
§ 3. That Wages do not vary in Proportion to the Productiveness of
Labour and are not independent of the disposable Capital . . 295
§ 4. Determination of the Rate of Wages under Conditions of Economic
Statics 301
§ 5. Some unfounded Objections to the Wage-Fund Theory . . . 304
§ 6. Determination of the Rate of Wages under Conditions of Economic
Dynamics 306
INDEX OF AUTHORS 309
INDEX OF SUBJECTS 313
PART I
THE THEORY OF UTILITY
rx
CHAPTER I
OF THE SUBJECT-MATTER OF ECONOMIC SCIENCE
ECONOMIC science consists of the laws of wealth systematically
deduced from the hypothesis that men are actuated exclusively
by the desire to realise the fullest possible satisfaction of their
wants, with the least possible individual sacrifice. This
hypothesis is appropriately termed the hedonic premiss of
economics, inasmuch as every economic theorem may be ex-
pressed in the form of the conclusion of a syllogism, having
for its major or minor premiss the hedonic hypothesis, and for
its other premiss some matter of fact, which may be a truth
borrowed from some other science, or ascertained inductively
by the economist himself. Naturally, this reduction of any
one economic theorem to its simplest form cannot, for the
most part, be effected immediately ; the theorem in question
must be successively resolved into others more proximate to
itself and less remote from the fountain-head of all economic
science. The category of premisses of fact comprises chiefly
the more or less complex technological data utilised by economic
science, consisting of the mechanical and chemical laws of those
bodies which in economics are regarded as commodities, and of
the biological, psychological and sociological laws that govern
man and other organic beings.1 The demonstration of the
truth of these premisses pertains to the science to which
they respectively belong : economic science can only accept
1 P. Geddes, An Analysis of the Principles of Economics, part i. Williams
and Norgate, 1885, London.
4 THE THEORY OF UTILITY PART i
them, until they are modified, or their accuracy is impugned,
by the science which originated them. Thus, for instance,
the theory of the factors determining the magnitude of markets,
rests, if we utilise it for a classification of all products, upon
data derived from commercial technology ; whilst the Kicardian
theory of rent presupposes data derived from agrarian tech-
nology. Sometimes economics requires a groundwork of facts
which other sciences, owing to their special nature or trend,
omit to investigate ; in which case it proceeds itself to ascertain
these facts by the induction and generalisation of typical
data. These researches after premisses for economic theorems
are however, though often necessary, and always useful, never-
theless mere prolegomena, or even digressions, from the
economist's point of view ; thus for instance, considered under
this aspect, the greater part of Malthus's celebrated work on
the Principles of Population is a digression.
Lastly, it may be convenient to assume, as a hypothesis,
the existence or non-existence (as the case may be) of one or
more facts, without any inductive examination as to their
truth. Well-known instances of hypotheses that frequently
occur in economics are : the existence of perfect industrial
or commercial competition, the existence of a close market, of
non- competing groups, and other such conditions. More
especially it may be necessary, owing to the impossibility
of having recourse to experiments, to make use of hypotheses
whenever we want to determine the isolated effect of a moral
or physical force, that is manifested only in conjunction with
concomitant forces, in cases falling within the scope of historic
observation. This is done by supposing a market to be in
equilibrium, by supposing a new force to come into existence,
by calculating or determining then the new state of equilibrium,
and comparing it with the preceding one. Of course the
properties of a market supposed to be in equilibrium must
be, and are, known to students of economics.
It is a mistake to give the name of economic laws, as is
occasionally done, to some of the premisses of which we have
been speaking; for though they are indeed laws, inasmuch aa
they are constant uniformities of nature expressed in the form
of propositions of co-existence, succession, and equality or in-
equality, yet they are not economic in their nature. This
CHAP, i ECONOMIC SCIENCE 5
mistake is most commonly made with reference to those data
which economists have sought out for themselves, owing to
their not having been supplied by any other science. Thus,
for instance, it is a misnomer to speak of the economic, law of
decreasing productivity, or of the economic law of definite pro-
portions ; not that they are untrue, nor that they are not of
capital importance to the economist ; but because they pertain
to other branches of science, or will certainly do so some day ;
as has indeed happened with the law of natural selection, which
was perceived and utilised by the economists long before its
bearing and importance were realised by the naturalists.
It follows from what has been stated that the advancement
of economic science can be furthered only in two ways, viz. :
by the discovery of new premisses pregnant with inferences,
or by the discovery of new conclusions drawn from known
premisses.
It is easy to understand how the fullest satisfaction of his
wants, at the least possible cost, has come to be regarded as
the specific characteristic of the homo ceconomicus ; inasmuch
as an economic problem, in a broad sense, presents itself when-
ever it is desired to obtain a given result with the smallest
comparative means; or, conversely, to obtain any maximum
result with any given means. Economic problems, in a broad
sense, are, e.g. those which constitute the mathematical
doctrine known by the generic name : de maximis et minimis.
Thus the problem of inscribing in a given triangle a rectangle
of maximum dimensions, or that of circumscribing a given
sphere with a minimum cone, or yet again that of determining
the case in which the sum of two variable quantities having
a constant product is least, are problems of mathematical
economics ; the object being always to obtain a given result with
the minimum quantity of means of a determinate kind. In the
same way, there are problems of mechanical economics in which
the aim is to obtain maxima of energy, velocity, or resistance,
with minima of cdst, friction, weight, volume, etc. In the
same way, too, we speak of an economy of nature, or of a
" law of the minimum of action," wherever she reveals to us
organic or inorganic phenomena produced with the minimum
amount of energy required for the purpose.1
1 The so-called ' ' law of the minimum of action, "due originally to Maupertuis
6 THE THEORY OF UTILITY PART i
Economic science, strictly so called, or political economy,
is not therefore defined in the most appropriate manner, when
it is termed simply the science of the laws of wealth, or of the
production, consumption, circulation and distribution of the
same; for many other sciences and arts also treat of tine
phenomena or subjects. Economics, for instance, lays down
no precepts for the cultivation of land, or the manufacture of
industrial products, nor yet does it concern itself with the
physiological phenomena of nutrition. Attempts have been
made to get over the difficulty presented by the distinction
between economic and technological phenomena and the other
analogous, but more general, difficulty presented by the dis-
tinction between economics and those sciences which apparently
deal with the same subject-matter, by observing that if certain
sciences are distinguished from each other by the difference of
their subjects, — as is for instance the case with mineralogy and
botany — others instead are distinguished from each other by
the different aspects under which they consider the same subject ;
and that this is precisely the case as regards economics and
the numerous other branches of knowledge which, like it,
(1746), must be stripped of the teleological conceptions that coloured it down to
the time of Lagrange. There is no proof that nature ever acts with any intent,
or in conformity with any purpose, or to realise any aims ; her processes are all
causal. The principle of the minimum of action signifies simply that the motion
of a system of forces, howsoever composed, is disturbed only in proportion to
the magnitude of the disturbing forces ; so that any disturbance in excess of
that proportion would be without a cause. In other words, the motion follows,
as nearly as circumstances admit, the course it would pursue if it were un-
impeded. For a brief history of this principle, see H. v. Helmholtz, Wisscn-
schaftliche Abhandlungen, vol. iii. No. cxxi. pp. 240-268, Leipzig, Barth, 1895.
Perfectly analogous is the view taken by economists of the hedonic principle, and
accordingly a series of writers, and among them — to quote one of the earliest and
one of the latest — Briganti and Jevons, have called economics the mechanics of
pleasure, or of hedonism. See Filippo Briganti, Esame economico del sistcma
civile, cap.i. §5, p. 19, Collezione Custodi ; W. S. Jevons, The Theory of Political
Economy, 2nd ed. 1879, Macmillan, London, Pref. p. vii., Introduction, p. 23.
Indeed, even Maupertuis compared the desire for maximum pleasures to the
law of the minimum of action ; and Verri and Ortes appear to me to have been
influenced by him in adopting, as the basis of theoretical economics, the "cal-
culus of pleasures and pains." On teleology and the rationale of pain, see
Regalia E., Rivista di Filosofia Scicntifica, Anno III. No. 2, Sept. Oct. 1883,
p. 187, in which the view is combated that in the economy of nature pain has
a purpose, and is, in this respect, a punishment.
CHAP, i ECONOMIC SCIENCE 7
treat of labour, capital, natural agents, cost, rent, exchanges,
industries, consumption, commodities, personal services, etc.
Now this explanation must be regarded as a popular, and not
very accurate, form of expressing a very simple truth, viz. that,
strictly speaking, differences in the aspect, or point of view, con-
stitute different subjects; for any two sciences which appar-
ently treat of the same subject or phenomenon, but from
different points of view, contemplate different properties of such
subject or phenomenon ; and these different properties, which
engage the several attention of the two sciences, constitute in
fact different subject-matters.1 Whilst therefore it does not
appear that economics treats of phenomena peculiar to itself,
and distinct from those contemplated, at least incidentally, by
moral philosophy, jurisprudence, physiology, and a hundred
other sciences and technical arts, which, like it, treat of man,
his actions and their causes, the objects he pursues, shuns,
transforms, etc. ; on the other hand no room for confusion is
left, if we note that economic science considers, in all the
processes connected with wealth, only the workings of the law
of the minimum of action ; that is : it either recognises in these
processes the realisation of the hedonic hypothesis, or supposes
that they take place under the operation of the hedonic postulate.2
1 "La science 6tudie, non les corps, mais les faits dont les corps sont le
theatre. Les corps passent, les faits demeurent. Des faits, leurs rapports et
leurs lois, tel est 1'objet de toute 6tude scientifique. D'ailleurs, les sciences
ne peuvent differer qu'en raison de la difference de leurs objets ou des fairs
qu'elles etudient. Ainsi, pour differencier les sciences, il faut differencier les
faits." L. Walras, fiUments d'econ. pol. pure, 2e ed. 1889 ; 2e le?on, § 16,
p. 38.
2 F. Y. Edgeworth, Mathematical Psychics, Kegan, London, 1881. "Now,
it is remarkable that the principal inquiries in Social Science may be viewed as
maximum problems. For economics investigates the arrangements between
agents, each tending to his own maximum utility ; and politics and utilitarian
ethics investigate the arrangements which conduce to the maximum sum total
of utility" (p. 6). "The economical calculus investigates the equilibrium of a
system of hedonic forces each tending to maximum individual utility ; the
utilitarian calculus, the equilibrium of a system in which each and all tend to
maximum universal utility " (p. 16). Economics has no method of investiga-
tion peculiar to itself, i.e. no logical methods of its own. There is not a single
species of logical argumentation which may not, in some instance, be turned to
account. Consequently the best training in logic for students of economics
is supplied by such works as those of A. de Morgan, E. Schroder, J. Venn,
W. S. Jevons, A. Bain, W. Wundt, M. W. Drobisch, J. N. Keynes, etc. But
8 THE THEORY OF UTILITY PART i
By analysing the hedonic principle, we shall find that for this
definition of economic science we may substitute another,
equivalent to it, but briefer and clearer, viz. the Science of
Value.
numerous methodological books have been written by economists with special
reference to economics, and of these some may be read with great profit, not so
much for their logical, as for their economic, contents. Such are : J. E.
Cairnes, Character and Logical Method of Political Economy ; W. Bagehot,
Economic Studies; C. Menger, Untersuchungcn uber die Methode der Social-
icissenschaften ; and J. N. Keynes, TJie Scope and Method of Political Economy.
CHAPTEK II
OF THE HEDONIC PRINCIPLE
§ 1. Meaning of the Hedonic Principle and its Correspondence
with the Psychological Reality
THE economic hypothesis according to which men are actuated
in the production, consumption, distribution and circulation
of wealth, exclusively by the desire to obtain the maximum
satisfaction of their wants that circumstances admit of, with
the least possible individual sacrifice, may be accepted as the
postulate of a condition of fact, concerning which it would be
irrelevant to inquire whether it accords more or less closely
with real life. In other words, whether and to what
extent the hypothesis of psychological hedonism, — from which
every economic truth is deduced, — is in harmony or at variance
with the motives that really determine human actions, — either
generally, or more particularly as regards the acquisition and
disposal of wealth, — is not a question that need be solved before
we can decide as to the truth or accuracy of the economic
theorems that flow from it. Suppose, indeed, that we refrain
from examining the correspondence between the hypothesis of
psychologic hedonism and actual fact, and that we regard that
hypothesis as non-subsistent, or as subsistent in an unknown
degree ; then provided the economic theorems are rigorously
deduced from the premisses, they will none the less be incon-
testable truths, within the limits of the hypothesis ; that is,
they will be hypothetical truths, and will reveal to us what
the action of egoism, or of individual interest, would be, in the
most varied environments, were that motive to be exclusively
10 THE THEORY OF UTILITY PART i
and universally operative. If, however, the non-existence
were demonstrated of the force whose effects it is the business
of economics to study, the latter would in that case be an idle
science, though a true one, inasmuch as it could never form
the basis of any art or preceptive discipline ; though indeed
even this conclusion might be inaccurate ; for if in this case
it were further demonstrated that the opposite of the pos-
tulated force, i.e. altruism, existed, then, inasmuch as the
latter would, if universal and isolated, produce the same effects
as egoism, it would probably be convenient to work out the
problems relating to it in terms of egoism, just as it is some-
times convenient to invert the signs of an equation in order
to solve it.1 If, on the other hand, the non-existence of
egoism as the mainspring of human action is not proved, but
the extent to which the hedonic hypothesis corresponds with
psychological fact is only doubtful, as not having been
sufficiently investigated, it is obvious that the economic
theorems must, a priori, be deemed valid, as regards the world
of fact, to the extent of the said correspondence ; and that
they will form the groundwork of a preceptive discipline,
which need only be on its guard against omitting to examine
the correspondence between the circumstances of actual cases
and the conditions postulated by the theory. This is precisely
the present situation as regards this question ; so that pend-
ing the positive demonstration of the existence of that force
which the economist postulates, three different opinions are
advanced as to the accordance of the hedonic hypothesis with
what appears to be the psychological reality. By some it is
held that the hedonic hypothesis exhibits a typical trait in tli e
human character, which admits of the concurrent action of
other moral forces. In this case, economics, instead of study-
ing all the causes of human activity, — supposed or ascertained
to be of diverse natures, — would fix its attention on one alone,
making entire abstraction of every other, and having resolved
1 In fact, altruism, if supposed to be universal, neutralises itself. Titius,
e.g., from altruistic motives, asks much less than the current rate of interest for
the capital he lends. In that case, Cains will, from similar motives, feel
bound to offer much more than the current rate. Titius is willing to work
gratis as a labourer, and Cains is constrained by altruism to pay him hand-
somely. Moreover, in order to realise the maximum altruistic effect, one would
have to act in accordance with the most downright egoism.
CHAP, ii OF THE HEDONIC PRINCIPLE 11
a complex phenomenon into its elements, would make that the
isolated subject of its study, revealing only one aspect of the
empiric world, but that with perfect accuracy.1 Other writers
hold that the hedonic hypothesis contains the entire truth
concerning the human character, and excludes the concurrent
action of other moral forces, in certain departments of social
life ; that is, in certain places, at certain times, and in certain
social groups ; and that, within these limits, the hedonic
hypothesis is in complete accord with empiric reality.2
Finally, others hold that the only existent psychic force is
egoism ; and that every other apparently different force may
be ultimately reduced to this one; so that the hedonic
hypothesis is in absolute correspondence with universal
empiric reality.3
The proof of the existence of the force postulated by
economics is supplied both by self-observation and by obser-
vation of the motives from which other men act. In fact,
the observation that egoism or self-interest is one of the most
frequent and general causes of human actions, has been con-
stantly made on so vast a scale, and may be so easily repeated
by every one, that it may be doubted whether any one ques-
tions its accuracy ; in any case it cannot be denied that in
it economics possesses a more solid basis of fact than most
other sciences can lay claim to. Above all, it is evident that
commercial or industrial activity, or the activity (whatever its
nature may be) displayed by men in the pursuit of what is
commonly termed wealth, has no other motive than egoism.
1 J. S. Mill, Essays on some Unsettled Questions of Political Economy ; J. E.
Cairnes, The Character and Logical Method of Political Economy, Lecture II.
§§ 2 and 3. On the function of statistics with regard to economic theorems,
see W. Lexis, Zur Theorie der MassenerscJieinungen, 1877, ed. Wagner, Freiburg,
book i. pp. 2, 3.
2 W. Bagehot, The Postulates of English Political Economy, p. 5 ; The Pre-
liminaries of Political Economy, p. 79; Economic Studies, London, 1888.
8 Ch. Adr. Helvetius, Traite de r esprit, Tome I. Disc. II. chap. ii. p. 50, ed.
Bibliotheque Nationale, Paris : "Si 1'univers physique est soumis aux lois du
mouvement, l'univers moral ne Test pas moins a celles de 1'interet." Ant.
Genovesi, Lezioni di economia civile, part i. chap. ii. § 5, p. 33, Collez. Custodi :
"Now, nothing should be clearer to us than that, as was said above, pain and
pain only, in the sense already explained, is the motor principle of all human
actions and non-actions." § 6, p. 34 : "If the allaying of pain and solicitude
are termed interest — as indeed they are,— then it is clear that man acts naturally
only from motives of interest."
12 THE THEORY OF UTILITY PART i
This does not imply that, because they are actuated by
egoism, men must necessarily achieve their purpose of realis-
ing the satisfaction of their wants in the best manner, that
is : at the least cost or in the fullest measure, subject to the
condition that the utility of the last addition to their stock
should be equal to the utility of the last increment of labour
with which it is purchased ; for they may be misled by
ignorance of the means available for that purpose, and of the
properties of such means ; or else their efforts may be thwarted
by external compulsion of various kinds. Nor does it exclude
the possibility of their acting in conformity with customs,
or with the dictates of morality, or with any other rules of
conduct, even the most absurd or vicious, if they consider these
to be in accordance with the dictates of egoism. The very
terms of the hedonic postulate exclude any such construction.1
If from the proposition that " men, in addition possibly to
other motives that are held to be non-egoistic, are actuated
chiefly by personal interest " ; or from the alternative that, " in
certain spheres of human activity, the sole motive consists in
the desire to obtain the maximum satisfaction of one's wants,"
we pass to the proposition that the sole motive of every action is
the hedonic impulse, the demonstration becomes more arduous,
or at least more subtle, if not absolutely impossible. In the first
place, it may seem necessary to eliminate all unconscious actions,
and next all such as, though forming part of our consciousness,
are reflex. These are neither few, nor of secondary importance,
even in the case of an adult in the full enjoyment of his
faculties ; whilst, during the first months of an infant's life,
they probably absorb the whole of his activity.2 This excep-
tion must be borne in mind at all events so long as the hedonic
postulate is formulated in Bentham's terms, viz. that, with refer-
ence to each act, every human being inclines to that course of
conduct which, in his estimate of the conditions of the moment,
will contribute in the comparatively highest degree to promote
his happiness. In the second place, we must be on our guard
1 Religions, customs, morals and laws are explained by some writers as
rules of egoism, or utilitarianism, become partially obsolete. See A. de
Johannis, SulV universality e prccmincnza dei fenomeni economici, 1882,
Dumolard, Milan. A. Loria, Lcs bases tconomiques de la constitution sociale.
Alcan, Paris, 1893, 2nd ed.
2 See infra, part i. chap. iii. § 1.
CHAP, ii OF THE HEDONIC PRINCIPLE 13
against accepting the demonstration most commonly offered of
the foregoing thesis. This demonstration, which appears to
date back to Socrates, is, according as its form varies, now
tautological, now a petitio principii, now a vcrrepov Trporepov,
always a paralogism. The following is a sample of it : — Any
person who resolves to do something that is apparently not
egoistic, and is, in the common acceptation of the term,
virtuous, as, for instance, giving away half his substance
to the poor, or ministering gratuitously to the sick, is
actuated by motives of vanity, piety, or zeal for the welfare of
his fellow-men that outweigh all considerations of any advan-
tage to be derived from a different course of conduct ; or else
he cherishes the hope of a future reward, or experiences some
inward satisfaction ; in brief, he acts in accordance with some
interest of his own, but for which he would not act as we have
assumed. In other words, no one does what is right unless
he finds his happiness in so doing, or unless he thereby ex-
periences less pain than he would by pursuing the opposite
course of conduct ; and though human actions will not always be
determined by the immediate interest of the agent, but some-
times by the tribal interest, it will still be true, — even apart
from the fact that the tribal interest is only a derivative of in-
dividual interest, — that man acts in the sense that pleases him
best.1 The paralogism involved in this argument becomes
apparent, if we reflect, that it is not disputed that the actions
of which we are conscious, and which are not reflex, but willed,
are determined ~by motives; but that the controverted proposition
is : that the motive in every case is to procure a pleasure or to
shun a pain ; in other words, to promote one's self-interest to
the utmost. Now, by way of proving this proposition, on the
one hand stress is laid on the fact that, for an action to have
taken place, the agent must have been determined by a pre-
ponderating motive, — which was granted ; — and on the other
hand it is assumed that the motive which so influenced
him to act in one sense rather than in another was,/o?* that
very reason, an individual interest, i.e. a present or prospective
pleasure or pain. This is simply to beg the question.2
1 Gabelli, L'uomo e le scienze morali, 2nd ed. Florence, Le Monnier, 1871,
chap. v. pp. 142-149. .
2 In the same way we say : " The desire for one's own welfare, or the instinct
14 THE THEORY OF UTILITY PART i
To avoid doing so, we should be obliged to admit the possi-
bility of certain desires, volitions and actions being prompted,
not by pleasures and pains, but by one or more categories
of different sensations. In other words, either the correspond-
ence between the hedonic hypothesis and psychological fact is
not established otherwise than by a petitio principii, or else we
must admit the possible existence of other motives than plea-
sures and pains,1 and undertake at the same time to prove that
such other motives are never, or at least not generally, opera-
tive ;2 which proposition, equally with its opposite, appears to
be incapable of proof.3 There is however a series of con-
siderations, which, if it does not prove that the sole motive of
every human action is the desire to procure some pleasure or
to shun some pain, proves at all events that this motive is,
not only universal and most powerful, but likewise so multi-
form, that motives apparently most diverse from, are really
reducible to, it. In fact, if (in accordance with the tauto-
logical definition given by Maupertuis, for no other can be
given of a simple state of mind) we take " pleasures " to mean
those sensations which incite to acts calculated to perpetuate
of self-preservation, makes one act along the Hue of the least resistance, or of the
greatest traction. What is the line of the least resistance or of the greatest
traction, only appears, however, from the direction actually taken ; and to
explain the direction taken by the line of the least resistance, and the line of
the least resistance by the direction taken, is to argue in a circle."
1 Ex. (jr. Von Kirchmann maintains that the ultimate motives of all
wilful actions do not consist exclusively of sensations, actual or foreseen, of
pleasure or pain ; but that for an entire series of actions the determining
motive is a feeling of respect or reverence for some authority (Achtungsgcfilhl] ;
arid that these two mainsprings of action are irreducible inter se. As this
demonstration rests ultimately on its authors self-observation, it is at once
inconclusive and irrefutable. See Von Kirchmann, Die Grundbegriffc dcs Ecchts
und der Moral, and by the same author, Kcdechismus der Philosophic, Leipzig,
Weber, 1877, Theil ii. chap. i. p. 141 et seq. In the same connection see Cogliolo's
Filosofia del diritto private, Manual! Barbera, p. 36. For a masterly discussion
of this subject, see H. Sidgwick, The Methods of Ethics, 3rd ed. 1884,
Macmillan, book i. chap. vi. and book ii. A good epitome for students is
A. Baker, Outlines of Logic, Psychology, and Ethics, London, 1891, p. 123 et
seq. For a history of ethical doctrines, see W. Wundt, Ethik, Enke, Stutt-
gart, 1886, p. 332 ct seq.
2 J. S. Mill, System of Logic, book vi. ch. viii. § 3, p. 580, people's ed.
1884, Longmans, London. H. Sidgwick, I.e. book i. chap. iv. § 2, pp. 42-44 ;
Austin, The Province of Jurisprudence Determined, 2nd ed. 1861, Murray,
London, vol. i. pp. 103-107.
z A. Bain, Logic, 2nd ed. 1873, Longmans, London, part ii. book v. p. 315.
CHAP, ii OF THE HE DO NIC PRINCIPLE 15
any pleasurable sensations that are present to our conscious-
ness, or to procure such sensations if they are only represented
in our consciousness ; and if we take " pains " to mean those
sensations which incite to acts intended to remove or prevent
them, we see at once that the former must be concomitants of
acts tending to the preservation of the organism, whilst the
latter must be concomitants of acts that are prejudicial to it.
For if the reverse were the case : if on the one hand pleasur-
able sensations were the concomitants of acts detrimental to
the organism, and on the other hand, painful sensations wTere
the concomitants of acts beneficial to the organism, so that the
former would be sought after and the latter shunned, then
the speedy result would be the disappearance of the organism
so constituted, owing to its persistence in selecting conditions
unfavourable to its development and preservation, and to its
repugnance to subsist under favourable conditions.1 As
therefore only those species can survive in which pleasurable
sensations accompany acts conducive to the preservation of the
organism, and in which painful sensations accompany acts
directly or indirectly injurious to it, it follows that to say
that man seeks to maximise his happiness and to minimise his
pain, is tantamount to saying that he desires to promote his
preservation to the utmost. The observation that there are
pleasures that are noxious, and pains that are salutary, does
not refute this proposition ; for it must be borne in mind that,
frequently, specific and immediate pleasures are to be renounced,
in favour of greater pleasures that are generic and compara-
tively remote ; and further, that if pleasures are not always
reliable criteria of conduct, the reason is that the conditions
of existence, in the case of nearly all species, have undergone
and are undergoing a gradual change ; whence have arisen, and
1 H. Spencer, The Data of Ethics, 2nd ed. London, 1879, chap. vi. § 33, pp. 79
and following: "Sentient existence can evolve only on condition that pleasure-
giving acts are life-sustaining acts," p. 83. This theory coincides with that of
Verri, according to whom, pain is the laceration or violent irritation of our
physical frame, or the anticipation or apprehension of such laceration. Pleasure
is always a rapid diminution or cessation of pain. To set forth his theory
in detail would be tedious and unnecessary ; suffice it to point out that here
too we have the concomitancy of painful sensations with the impairing of
vitality, § 6, p. 37, and § 7, p. 42, Discorso sulV indole del piacere e del dolorc,
Collezione Custodi. See Melchiorre Gioja, Teleologia, part vi. § 2,':p. 5, ed.
1837.
16 THE THEORY OF UTILITY PART i
are continually arising, partial discrepancies between pleasur-
able sensations and life-sustaining acts, discrepancies occasion-
ing a process of readjustment that necessarily and certainly
takes place, but is often not completed within the period
required to effect a change in the environment of the organisms.
Having thus ascertained the equivalence of the instinct of
self-preservation and the hedonic postulate, it may be doubted
whether the former is not the more fundamental principle of
the two ; for whilst it may be argued that we care for our
life, only inasmuch as it affords us more pleasures than pains,
and that we should put an end to it — as indeed some men do
— as soon as that ceased to be the case, nevertheless it seems
more probable, having regard to what has been set forth
above, that things and actions appear pleasing or painful to
us, according as they are, or are not, conducive to our self-
preservation ; and that the latter in turn requires that we
should retain the environment amid which we have come into
existence.1 In other words, the order of genetic sequence of
the principles in question would seem to be the following :
the chemical composition and physical structure of organic
beings are determined by the environment in which they are
bred and exist ; the substances essential to their preservation
are those constituting the environment in which they origin-
ated and to which they owe their existence, whilst the acts
that conduce to their preservation are those that tend to
maintain their original environment ; their wants are the
results of variations in their composition, and are directed to
the substances constituting the environment ; in beings suscep-
tible of pleasurable and painful sensations, natural selection
causes sensations of pleasure to accompany acts that conduce
to the preservation of the species, through the elimination of
individuals for whom life-sustaining acts are not productive of
pleasure, and in whom acts prejudicial to life occasion no pain.
1 P. Mougeolle, Stcdiquc des civiliscdions, p. 417, Paris, Leroux, 1883.
Genetic priority is assigned by economists, sometimes to the instinct of self-
preservation, sometimes to the hedonic postulate ; but without any discussion of
their comparative claims to priority, and indeed suppressing all considerations
respecting the principle to which the preference is not accorded. See <
Hermann, Staatsw. Untcrsuchuiujcn, 2nd ed. Munich, 1S74; Ackermann, § 4,
p. 9 ; and Hearn's Plutology, London, 1864, p. 12, chap. i. § 1.
CHAP, ii OF THE HEDONIC PRINCIPLE 17
§ 2. Of the Principle of the Relativity of Sensations of
Pleasure and Pain
From the above theory we might deduce that of the
relativity of sensations of pleasure and pain, were we unable
to found it on an independent basis of observations. It is in
fact obvious that nothing is intrinsically pleasurable or dis-
agreeable ; on the one hand, we do not in the least know
whether things really are such as we perceive them to be, and
on the other, their perception by means of our senses procures
us sensations that are pleasing or painful, according to our
frame, and to the condition it happens to be in. Now, if
tastes are relative to the structure of the organism, and if that
structure is due to the environment in which the organism
has been evolved, it follows that tastes, — that is the pleasur-
ableness or painfulness of all things — come to be what the
environment has made them under the influence of natural
selection. Whilst the correspondence between the painfulness
of certain forces and the tendency of the latter to impair the
vitality of the organism, is common to all creatures, the
painful effect of a force of a given quantity and intensity
varies considerably with the size, the structure and the
condition of the organism subjected to the shock ; and the
same observation applies to the pleasantness of determinate
forces. Tastes differ, not only as between one race and another,
or as between one individual and another, but even the same
individual is differently affected by the same objects, according
to his age and state of health, and also as the quantity of
such objects and his environment vary.1
The relativity of sensations of pleasure and pain is an
economic fact of the greatest importance. We shall see
further on that a long series of economic theorems is based
upon it ; but already it possesses an interest for us, owing to
the relation in which it stands to the hedonic postulate.
Suppose a multitude of people all bent exclusively on maxim-
ising their pleasures and minimising their pains : if no other
actual or hypothetical condition supervenes to qualify the
hedonic postulate, the supposed multitude may even consist of
1 Spencer, The Data of Ethics, cliap. x. pp. 174-186.
C
18 THE THEORY OF UTILITY PART i
ascetics, or it may comprise groups of ascetics and groups
of individuals who are insensible to the attractions of remote
and (in their view) uncertain pleasures ; at the same time
there is room in it for perfect altruists and for every conceiv-
able gradation between them and absolute egoists. In fact
each of these groups would conform 'precisely to the hedonic
postulate, seeking after its greatest happiness, in accordance with
its own conception of what happiness is, which conception is
supposed to le different from the conceptions of happiness of the
several other groups. Now, it is obvious that if we thus divest
the hedonic postulate of all material contents, it becomes
absolutely sterile, and does not yield us even the simplest
deduction. If, for instance, a contractor offers a workman a
certain amount of remuneration per hour for a certain kind of
work, whilst another contractor offers him twice as much for
the same kind of work, it is not certain, or even probable, that
the workman will prefer to work for the one who offers him
the better terms, unless the hedonic hypothesis is qualified by
the fact, or ulterior hypothesis, that every workman regards
work as a pain, and remuneration as a pleasure, In the same
way, we cannot have laws of the value of exchange, if one of
the parties is egoistic and the other altruistic in an unknown
or variable degree ; and still less if the tastes of both parties
differ so much from the normal standard of mankind as to
compel us to regard them as insane. On the supposition of
an indefinite heterogeneity of structure, and therefore of tastes,
among the members of a society, there is an end to all economic
laws. Any one, for instance, who wished to enunciate the
economic law, that the rate of discount and the purchasing
power of money tend to vary in opposite directions} and to state
in addition the law of two exceptions to the more general
law, referable, the first to the purchasing power of money
measured exclusively in so-called securities, and the second to
a particular cause of the rise or fall of the discount, viz. a
sudden influx or efflux of coin, could not deduce these laws
from the hedonic postulate otherwise than by supposing a
society of individuals who regard as pleasures and pains
those things which are so considered by the persons who
frequent the Stock Exchange and the Markets. And if
1 Sidgwick's Principles, p. 260.
CHAP, ii OF THE HEDONIC PRINCIPLE 19
he were to demonstrate his theory by a series of observations,
he would be forced to deduce from these the inapplicability of
the hypothesis of an indefinite diversity of structure to the
environment that yielded him this inductive result; and to
admit instead, within certain limits, however wide, the exist-
ence of a certain analogy of structure.
Now what is the reason of this apparent airopLa ? Simply
this: that the hedonic postulate is by no means void of material
contents, these being supplied to it both by its assimilation to
the desire of self-preservation, and by matters of fact which are
sometimes implied in the argument, and sometimes stated
explicitly. The identification of the hedonic principle with
the desire of self-preservation involves our not considering as
pleasures and pains, qud the hedonic principle, any sensations
of either kind experienced by the deformed organs or vitiated
functions of individuals who are destined to be eliminated by
natural selection; and, on the contrary, our considering as
pleasures those sensations that sustain, and as pains those that
impair, the organism. Judgments at variance with this
standard, concerning things that are causes of pleasant or painful
sensations, are classed as anti-economic, and are not subjects of
our study, save in so far as they are causes of deviation in the
working of economic laws. Thus, for instance, the judgments
and acts of the anchorite are anti-economic, as also the
preference of a lower remuneration to a higher ; and many
forms of altruism are also anti-economic. A vast and some-
times variable content is supplied to the hedonic postulate by
matters of fact, or by what observation ascertains concerning
the pleasantness or painfulness of determinate things, under
determinate conditions. Thus it is a fact that labour is
painful, and that aversion to it increases with its duration and
intensity. Thus too it is a fact that successive increments of
any commodity, beyond a certain point, produce a decreasing
gratification. It is also a fact that people care for money
and for the things which are to be had for money. In an
environment in which these propositions were not facts, — and
there are environments in which certain kinds of labour
are pleasurable, or in which money is of no concern — a large
portion of the laws of economics would not be true, and prob-
ably in lieu of them we should have a series of propositions
20 THE THEORY OF UTILITY PART i
expressing constant uniformities of chronological or causal
sequence, of coexistence in space, or of attributes of equality
and inequality, which at present are wholly erroneous.
§ 3. Of Individual and Tribal Egoism
In most instances the qualifications of the hedonic postulate
are tacit and implied, being either self-evident or shown by
the context ; sometimes however they require to be specifically
stated. This is more particularly the case whenever it might
otherwise be doubtful whether individual or tribal egoism
is intended, and what differences may result from the reciprocal
substitution of these two hypotheses, each of which corresponds,
though in an unequal degree, with the hedonic postulate.
This will be made clear if we examine successively these two
forms of egoism, or of economic interest.
Let us first suppose an egoist whose every act tends
exclusively to maximise his happiness, regardless of that of
others. All acts conducing to his individual preservation
will probably be performed by him, since we may assume
that, as a rule, they will coincide with acts tending to
maximise his pleasures and minimise his pains ; but even
this is not certain, as it is also possible that they may
not so coincide. As for acts conducing to the preserva-
tion of his species, it is evident that none of them will be
performed by him, unless they coincide with acts he would in
any event have performed, as being conformable to his own
restricted hedonism. Now, inasmuch as acts conducive to the
preservation of the species may be, at least as probably, and
hence at least as often, acts entailing sacrifices that are not
compensated during the lifetime of the agent, as acts con-
formable to individual hedonism, it is clear that many acts
that conduce to the preservation of the species will be left
undone ; and it is further certain that the vitality of the
species will eventually — perhaps after a series of generations
of such egoists — become gravely impaired.
Let us now suppose an egoist so constituted as to identify
his own maximum happiness with that of his species : an
egoist whose every act tends to procure for his species the
maximum amount of happiness and minimum amount of pain.
CHAP, ii OF THE HEDONIC PRINCIPLE 21
Self-preservation will be the paramount rule of his conduct
until he has ensured the existence of the species ; thence-
forward it may well happen that the welfare of the species
will impose on him acts of self-sacrifice, or what others would
deem such, though to him they must still appear to be fraught
with happiness to himself. Each act tending to the preserva-
tion of the species will be performed by him, regardless of
the views of others as to its pleasurableness or painfulness.
Given these two types of egoists, it is clear that, in the
long run, they will be unable to subsist simultaneously in the
same environment, and that the former will be eliminated
by natural selection. Hence, after a certain lapse of time,
only the second species of egoists will remain, whilst together
with the former type will have disappeared the ideas they
entertained concerning the hedonic maxima and minima, as
also the sensations produced in them by the accidents of the
environment ; whilst on the other hand habits of thought and
sensation of the opposite character will have become confirmed
and strengthened. Hence this must be regarded as a more
complete, intense and perfect form of egoism, as the more
egoistical of the two, since it yields a sum of pleasures in-
finitely greater than the other, because of indefinite duration.
Notwithstanding the substantial differences between individual
and tribal egoism, — which latter may indeed be regarded as a
qualified form of altruism, — it frequently happens that the
conduct of the homo ceconomicus, when actuated by individual
egoism, does not differ from his conduct when actuated by
tribal egoism.1 It happens, namely, that many problems
regarding the latter may be worked out as if they referred
exclusively to the former ; and this owing to a circumstance
already mentioned, but which it may be well to emphasise by
repetition. Tribal egoism presupposes a conditioned individual
1 As an instance of the difference between the conduct of the individual and
that of the tribal egoist, it may be mentioned that the former will in all prob-
ability limit his offspring as much as possible, and even refrain from having
any, in order not to compromise his self-preservation, or diminish his pleasures,
through the sacrifices incidental to the rearing of offspring. If large masses
of persons are actuated by individual egoism, this phenomenon may assume
the alarming proportions it has attained in France. The tribal egoist on the
contrary will indulge his desire for offspring within such limits as are necessary
to keep it from deteriorating in quality.
22 THE THEORY OF UTILITY PART i
egoism, inasmuch as it is impossible to realise the ends of
tribal egoism unless a large part of the ends of individual
egoism have first been realised ; in other words, it is necessary
that the homo ceconomicus actuated by tribal egoism should
first make sure of his own preservation and more perfect
development, before he can benefit the species, or contribute
to its happiness in the highest degree that circumstances
admit of.1 Hence economic problems may be worked out just
as easily and correctly by taking as our rule the hypothesis of
a homo ceconomicus actuated by individual egoism, who, with
regard to each act, weighs the increase of vitality it is calcu-
lated to procure him against the diminution of vitality it will
cost him, — provided always that this hypothesis be qualified
or conditioned in particular cases, — as by having recourse ex-
clusively to the wider hypothesis, — wider inasmuch as it com-
prises the former, — of a homo ceconomicus actuated by tribal
egoism, who with regard to each act will compare the expected
increase of tribal happiness or vitality with the apprehended
diminution of his individual happiness.
It must be observed, however, that the second hypothesis
is the simpler and truer one, and that by its means the scope
of ordinary economic problems is extended to comprise those
also which are usually classified separately as forming part of
a special class of problems of State economics. It is commonly
held that, for the State, all knowledge relating to future events
possesses an incomparably greater importance than for in-
dividuals, provided always that such knowledge falls within
the sphere of interests common to both ; in other words, it is
considered that, in the sphere of State interests, those relating
to the future are much more numerous and weighty than is
the case in the sphere of private interests. Hence the old
adage, that the interests of the State are of a prospective
character ; from which it would follow that the principles of
sciences treating of the State likewise partake of such character
in a predominant degree. Now the fact is simply this : — Both
the State and the individual have in the first place present
interests; that is, they are benefited or prejudiced by certain
present situations of fact, and they act in conformity with this
first series of interests. In the second place, both are interested
1 H. Spencer, op. cit. chap. xi. § 68, pp. 187 and following.
CHAP, ii OF THE HEDONIC PRINCIPLE 23
in the future, and consequently act in accordance with a
second series of interests, bringing it into harmony with the
first, according to certain very complex psychological laws.
But those who hold that the State is in its nature more
essentially and characteristically prospective than individuals,
argue that the life of the State, being more protracted than
that of the individual, is more richly endowed with elements
of prospective interest, even on the hypothesis of an original
equality ; and it is, above all, this distinctive feature that has
given rise to a series of singular doctrines as to the ethical
nature of the State itself. Now, from what has been set
forth respecting individual and tribal egoism, it is clear that
if the State, as it is contended, safeguards all its prospective
interests, giving them the weight that is necessary to ensure
its own preservation for an indefinite period, in so doing it
is only actuated by tribal egoism ; and slight reflection will
suffice to show that the State can only exist so long as the
members animated by the same tribal egoism predominate
over those who are animated by individual egoism.
§ 4. Of the Commensur ability of Pleasures and Pains
The practice of the hedonic principle presupposes that
sensations of pleasure and pain are susceptible of commensura-
tion,1 whichever formula of the principle may be preferred.
Whether an individual seeks by his every act the maximum
satisfaction of his needs with the least possible self-sacrifice,
or at the least possible cost ; or whether he desires the largest
possible measure of wellbeing, which implies that he desires
to attain it, if circumstances do not admit of his doing so
without effort, at all events with the least possible degree of
personal inconvenience ; or yet again whether he acts in
conformity with his own interest, or in the sense most con-
ducive to his own preservation, or maximising his pleasures
and minimising his pains; — in each of these cases it is supposed
that a hedonic or egoistic calculus is effected, consisting of the
commensuration of the good and evil, the pleasures and pains,
the increments and diminutions of vitality, the greater and
lesser interests, the satisfactions and the sacrifices that are
1 Verri, loc, cit. § 14, pp. 83-85.
24 THE THEORY OF UTILITY PART i
compared with each other, or among which a choice is made.
This calculus may apply to four different combinations of
pleasures and pains ; for we have to consider whether it is
worth while either : 1st, incurring a pain " a " in order to
obtain a pleasure " A -f AA " ; or 2nd, incurring a pain " a " in
order to avoid another " a -f- Aa " ; or 3rd, forgoing a pleasure
" A " in order to obtain another " A + AA " ; or 4th, forgoing
a pleasure " A " in order to avoid a pain " a + Aa." l In each
of these cases there figures as COST, either the pain that is
endured to obtain a pleasure, or the lesser pain incurred in
order to avoid a greater pain, or the lesser pleasure that is
renounced in order to obtain a greater, or the pleasure that is
renounced in order to shun a pain; and as GAIN or
KEMUNEBATION what is obtained by such means.2 We
may also imagine the case of the possession of a good being
conditioned disjunctively, either by a pain to be borne, or by
a pleasure (inferior to the one inherent in the attainment of
the good in question) to be renounced. In that case, the cost
must be expressed by that of the two pains, or of the two
discomforts, which is least ; because that will be the only one
suffered by the hedonist. If, on the contrary, the possession of
a good is conditioned cumulatively by a pain that must be
incurred and by a pleasure that must be renounced, the cost
of the good is the sum of the two pains. If, finally, the
possession of a good is conditioned by submission to a pain,
which would otherwise have availed to procure us some other
good, or to avert some other pain, and if the attainment of
such other good, or the avoidance of such other pain, outweighs
the first-mentioned pain, then the cost of the first-mentioned
good is expressed by the other good we have had to forgo,
or the other pain we have had to endure, since that is the
full extent of the sacrifice made.8 Now, we call VALUE the
1 By A we denote an increment ; by a a quantity of pain ; by A a quantity
of pleasure equivalent to a of pain.
2 Verri, loc. cit. : "If therefore in practice men constantly compare pains and
pleasures, we must conclude that they are two proximately comparable quantities.
Our every action resembles a sale : we give money to obtain a thing ; parting
with the money is in itself an evil ; but when we buy we consider that the tiling
we want is a greater good than that evil. In whatever condition he is placed,
even on the throne, man is forced to perform a number of arduous, inconvenient
and toilsome acts, in order to procure himself pleasures."
3 The following are instances of the various cases : (1) To procure a pleasure
CHAP, ii OF THE HEDONIC PRINCIPLE 25
ratio of cost to remuneration, whether in the case of the direct
trucking of one commodity against another by two persons, or
in that of a single person who undergoes some labour in order
to obtain some good, the fruit of such labour, or who submits
to some pain in order to obtain a pleasure. To put it in the
words of Francesco Ferrara, we have the phenomenon of value
in individual economics, no less than in the economics of ex-
change; and the hedonic calculus consists of JUDGMENTS
ON VALUE.1 The question now arises whether the com-
parisons referred to between costs and rewards do not some-
times occur with reference to incommensurable quantities, and
are not therefore paralogistic.
As we have already seen, no definition properly so called
can be given of what constitutes a pleasure or a pain, because
these are elementary conditions of our perceptive faculty or
consciousness.2 On the other hand, genetic and teleological
definitions are barren, constituting, as they do, a mutatio elenchi
as regards the problem. The hedonic calculus supposes that
they are opposite, but homogeneous, sensations, and therefore
susceptible of treatment as negative and positive quantities.
worth 11 involves working 9 or spending 10 : here the cost is 9 ; (2) to procure
a pleasure worth 20 involves working 9 and spending 10 : here the cost is 19 ;
(3) to procure a pleasure worth 12 involves working 10, but this labour would
procure a pleasure worth 1 1 if not employed in procuring the one that is worth
12 : here the cost will be 11.
1 Biblioteca dell' economista, vol. v. p. 51. Introduction to Senior, and
vol. xiii. Carey, chap. ii. p. 335. The hedonic postulate, both in isolated and in
social economics, may be briefly formulated as the precept to maximise always
the value of one's stock ; but this formula, which has been repeatedly pro-
posed, requires the term " value " to be taken in the sense of residual utility
or consumer's rent (see part i. chap. iv. § 3), which is not done by us in this
work. Value signifies here only the ratio of two hedonic quantities.
2 This is the opinion of Verri, loc. cit. § 11, pp. 68, 69 : "In fact a sensation
supposes a change of state in the organ that experiences it, i.e. either an increased
or a diminished tension : if the organ was in a perfect state, the first sensation
removes it therefrom, and is consequently a disorder and a pain ; if, on the
contrary, the organ was vitiated, either by excessive tension or by excessive
relaxation, the first action of external bodies may prove remedial, but it will be
preceded by the pain produced by organic derangement ; and thus it follows
that the first sensation must necessarily be painful. . . . The essence of sensibility
therefore involves the priority of pain, for either the action affecting our organs is
painful, or it applies a remedy to the pained organism, or it is ineffectual, neutral
and null. Pain is an action ; pleasure is a rapid cessation of such action. Man is
thus set to live in the midst of suffering." Ortes took a similar view. See Calcolo
de' piaceri e de' dolori della vita umana, § 4, p. 307, vol. iv. ed. Custodi, tome xxiv.
26 THE THEORY OF UTILITY PART i
It is however a moot point whether pleasures are only
diminutions or negations of painful sensations, or whether
they are qualitatively distinct and opposite sensations. The
former opinion appears to be most in keeping with the results
of self-observation, since we experience painful or pleasurable
sensations only with respect to a certain antecedent emotional
condition. If this doctrine were more certain, the greatest
obstacle to the commensuration of pleasures and pains would
be removed. Since pleasures are differentiated from pains,
cceteris paribus, by their duration, and, their duration being
equal, by their intensity, it follows that the more lasting
pleasure appears to be the greater when the degree of in-
tensity is the same, and that the intenser pleasure appears to
be the greater when the duration is equal ; and no quantitative
difference is any obstacle to commensuration, as we can always
set off the greater intensity of one pleasure against the longer
duration of another. This holds good however only in theory,
for, in practice, the shortness of human life would frequently
prevent our setting off against very intense pleasures others
less intense of adequate duration.1 Moreover, pleasures like
pains may be either presently felt, or only anticipated ; and
pleasures as well as pains, that are only anticipated, may be
certain or uncertain, and more or less proximate or remote.
JSTow, some doubt may exist as to the method of estimating
or weighing pleasures or pains which, their duration and in-
tensity being equal, differ in this, that some are present and
thus certain and infinitely proximate, whilst the others are
only anticipated, and either certain or uncertain, and in either
case are subdivided into proximate and remote. These five
modes of being of our sensations of pleasure or pain give rise
to ten binary combinations, as to each of which the hedonic
theory requires that commensuration should be possible. It
has indeed been doubted whether the nearness or remoteness of
an expected pleasure or pain can affect the hedonic calculus,
independently of the uncertainty of the event which remote-
ness for the most part implies; and it has been contended that
a remote pleasure or pain, if supposed to be absolutely certain,
1 Verri, loc. cit. § 10, p. 61. A singular error in valuation that is sometimes
committed is also pointed out there : preference is given to " the lesser intensity
over the lesser duration of a pain."
CHAP, ii OF THE HEDONIC PRINCIPLE 27
must, other conditions being equal, be of equal weight with a
proximate pleasure or pain. This is perfectly correct, and acts
determined by a different view, if we had any instance of
them, must be considered anti-hedonic or anti-economic. But
remoteness must be construed as a form of uncertainty affecting
both the probability of the occurrence of the pleasurable or
painful event, and the probability that the individual con-
cerned will be agreeably or painfully affected by it when it
actually happens.1 Given this explanation of the conception
of remoteness or propinquity of anticipated pleasures and
pains, the further criticism to which we may subject it becomes
a simple question of words. But, even if that were not the
case, the complexity and nicety of hedonic valuations of these
elements would warrant the suspicion that, in the majority of
instances, these valuations are carried out with only approxi-
mate correctness. This is tantamount to saying that error is
a principal source of anti-economic acts, and operates in this
sense on a vast scale (confer post, chap. iv. §6). The commen-
suration of pleasures and pains is however rendered still more
difficult in a special instance. The tribal hedonist, as we
have briefly designated him, has frequently to estimate his
own pleasures as compared with those of others, i.e. with those
of his species, and it is difficult to understand how this can be
done without error, compatibly with the law of the relativity
of sensations of pleasure and pain.2 The fact remains that
these hedonic valuations are constantly made by all ; but with
what admixture of error, we do not know.
1 An individual interested in a future, but certain, pleasurable or painful
event, may, for instance, doubt whether he will still be alive when it actually
comes to pass. It would be erroneous to cite, as an instance impugning the
doctrine according to which a remote, but certain, event should, c&teris paribus,
be taken to be equal to a proximate event, the fact that death, the most certain
of events for every individual, preoccupies the mind much less when it is believed
to be distant than when it is thought to be near. For it is clear that the
prospect of death, as a motive of our actions, must have greater weight if it is
believed to be near, than if it is thought to be distant ; because when it does
happen, all the pleasures of life come to an end, and hence its nearness, or
remoteness, curtails, or prolongs, the series of these pleasures. Thus, it is not the
near or distant prospect of death that supplies the motive of our actions, but the
varying quantity of pleasures or pains we look forward to during our lifetime ;
which is quite a different matter.
2 Respecting the commensuration of pleasures and pains, see contra : H. Sidg-
wick, op. cit. p. 115 ; pro : Spencer, op. cit. chap. ix. pp. 150 and following.
28 THE THEORY OF UTILITY PARTI
§ 5. Of the Fundamental Law of our Sensibility
Our aptitude to receive pleasurable impressions is subject to
two factual laws possessing fundamental importance as economic
premisses. These laws are revealed by our daily experience,
and in psychology they have been known since the time of
Aristotle. They are thus formulated by Gossen : — *
1st. Every enjoyment, as it is 'prolonged, decreases, and at
length ceases altogether.
2nd. An enjoyment has, when repeated, a lesser initial
intensity and a shorter duration than it had before ; and its
intensity and duration decrease the more, the shorter the
intervals at which it is repeated.
It is obvious, for instance, that to a hungry man the first
portion of food he partakes of affords an intenser pleasure than
the second, and the second than the third, and so on till the
point of satiety, or even of nausea, is reached. It is likewise
obvious that, given the same kind of food, its repeated use for
the purpose of appeasing the cravings of hunger, affords a
decreasing pleasure. This explains, for instance, the reason
why a meat diet is relished much more by those who only
partake of it on exceptional occasions than by those who are
accustomed to its daily use ; and why those who are accustomed
to eat bread every day derive a keener enjoyment from this
food when they have been obliged to abstain from it for some
days. The law of the decrease of protracted enjoyments applies
to every kind of enjoyment or consumption of commodities.
Daily observation will confirm to every one the rigorous ex-
actness of Jennings's contention, that by dint of gazing at an
1 Hermann Heinrich Gossen, Entwickelung der Gcsetze dcs menschlichen
Verkchrs unddcr daraus fliesscndcn Regeln fur menschliclies Handeln, Brunswick,
Vieweg, 1854 ; now Berlin, Prager, pp. 4-9, although not a new edition. See
also Richard Jennings, Natural Elements of Political Economy, Longmans, London,
1855, book i. chap. i. pp. 96-99, § 7, Law of the Variation of Sensations. This
author has analysed even more minutely and subtly than Gossen the law of the
decrease of protracted enjoyments, as we shall see in ch. iii. § 3. Before both
these authors, in 1844 and again in 1849, J. Dupuit expounded the same laws,
but with numerical indices, instead of curves, Annalcs dcs ponts d <•/>
torn. xxv. 2nd series, pp. 170-248, Me"moire, No. 207, 1849, Paris, Carillan-
Gceury.
CHAP. II
OF THE HEDONIC PRINCIPLE
29
object, we end by ceasing to perceive it ; by dint of listening
to a sound, we cease to hear it ; that, in the same way, our
sense of smell becomes exhausted, and that the pleasures of
the palate end in nausea, or are transformed into painful
sensations. In view of their importance, it is worth while
examining the graphic expression of these laws devised by
Gossen.
Let a straight horizontal line OX (diagrams I.-IIL), which
we shall briefly term the abscissa, express the time a sensation
lasts : each point of the line corresponding with an instant of
m
O a b c
DIAGRAM I.
time, and each part of the line, Oa, ab, be, etc., corresponding
with intervals of time that are in the same proportion to each
other, and to the entire duration, as the said parts of the line
are to each other and to the whole line.
Let a series of straight lines .OY, aav bbv ccp etc., which we
shall briefly term the ordinates (and which form known angles
with OX, — let us say for the sake of simplicity, right angles,
so that they are vertical with respect to OX), be in the same
proportion to each other as the intensities of enjoyment
corresponding with the moments indicated on OX are to each
other. Thus OY^a comes to signify, for instance, the intensity
of the gratification experienced by a thirsty man during the
first interval Oa in which he is drinking ; aa^b the intensity
30
THE THEORY OF UTILITY
PART I
during the second interval ab ; 11^^ the intensity during the
third interval be, and so forth. By connecting the extremities
of the ordinates, i.e. by drawing the line Ya^c^ etc., we shall
have the curve of the intensities of enjoyment. This curve
may follow the most varied course, according to the nature of
the enjoyment we have to deal with and the individual to
whom it relates. It may, for instance, as in diagram I., begin
high up (i.e. the initial ordinates may be long), and descend
gradually till it reaches, or sinks below, OX (i.e. the successive
ordinates may go on shortening down to zero), and then
become negative ; or it may begin, as in diagram II., at a
DIAGRAM II.
moderate height from OX, and gradually ascend till it attains
a maximum height, after which it declines like the curve in
diagram I. ; in which case we say it is constituted by increas-
ing ordinates till a maximum is reached, and then by decreasing
ones. But what is characteristic of it, and limits its possible
variations, is the more or less rapid and saltatory, but always
certain, ultimate decrease of the ordinates, until they are reduced
at some point on OX to zero. If we suppose the enjoyment
protracted beyond this point, the ordinates become negative
and increasing, that is, they must be expressed by straight
lines perpendicular to OX as before, but drawn in an opposite
direction and increasing successively, since they express painful
intensities. Let such be, for instance, the ordinates mm^ nnv
CHAP. II
OF THE HEDONIC PRINCIPLE
31
etc. As in most cases we know next to nothing of the rapidity
with which real hedonic curves decline, or of their particular
shapes whilst declining, Gossen is perfectly right in operating
exclusively with the simplest of curves, i.e. with straight lines,
as in diagram III. The reader must imagine Oa, db, ~bc, cd
to be the diameters of contiguous points on OX, looked at
under a microscope, which should so expand them. The
area OYa^i is to be
imagined as a thick
perpendicular line seen
through a strong magni-
fying glass, the area
aelfi is the next per-
pendicular line similarly
magnified, and so on as
regards the areas Ifc^
and cgdjl. If these
thick perpendicular lines
are only close enough to
each other, their upper
extremities will form a
continuous line MXN,
which Gossen supposes to be a straight line as in diagram III.
The operation with straight lines can easily be translated into
numerical examples. This method has been adopted success-
fully by Menger and his followers, and it dispenses with the
use of higher mathematics ; but the use of curves is necessary
for some of the nicer problems, and is extremely suggestive.
Before leaving this subject, it must still be noticed that,
although economics presupposes nearly always declining
hedonic curves, there are cases in which the fact must be
taken into consideration that we are concerned with their
ascending segments ; a circumstance conducing to so-called
positions of unstable equilibrium, as we shall see later on.
§ 6. Gossen' }s Two Theorems of the Hedonic Maxima l
From the factual law respecting the decrease of protracted
or repeated enjoyments, and from the hedonic postulate,
1 Gossen, op. cit. pp. 11, 12,
32 THE THEORY OF UTILITY PART i
certain theorems are derived concerning hedonic maxima
which go by the names of Gossen, of Walras, or of Jevons,
i.e. of those who first, and independently of each other,
enunciated and demonstrated them, and made them the
groundwork of all further economic exposition.
Gossen's first theorem runs as follows: —
Every enjoyment may be indulged in with such frequency
that a greater or a lesser frequency will yield inferior hedonic
results. In fact, an enjoyment protracted throughout a
duration OX (see any one of the preceding diagrams) ceases at
X to give pleasure; protracting it still further, the hedonic
ordinates become negative, that is, the enjoyment is trans-
formed into pain. In other words, the uninterrupted con-
tinuance in the use of what causes us pleasure ceases, after
a certain time, to increase the amount of pleasure afforded to
us. On the other hand, after an interval in the use of the
thing which afforded us gratification, our sensibility generally
revives, and its renewed use may again give us pleasure.
Now, if the interval between the first and second occasions
of our using a thing were of infinite duration, evidently the
sum of pleasure afforded to us would be merely that derived
from its use on the first occasion. Therefore between the
extreme of our obtaining only the amount of pleasure that a
thing is capable of affording us, if used without interruption
to the point of satiety, and the other extreme of our obtain-
ing this same amount by not repeating for an indefinite
time, notwithstanding our revived sensibility, the use of the
thing capable of affording us pleasure, there exists a hedonic
maximum dependent on the frequency of the repetition of the
enjoyment in question.
Gossen's second theorem is also an immediate consequence
of the law of decreasing enjoyments. It is formulated as
follows : —
Given the option of several pleasures, and a time so limited
as not to suffice for enjoying them all to the point of extinction,
we obtain a hedonic maximum by enjoying each pleasure in
such measure, that its intensity at the moment when the period
of fruition expires is equal to that of every other plea
In other words : The final degrees of intensity of pleasures
must be equal at the instant when the given time expires, what-
CHAP. II
OF THE HEDONIC PRINCIPLE
33
c d & f
DIAGRAM IY.
ever may have been the initial intensity of each kind of
pleasure.
In fact, given two pleasures of equal initial intensity and
which during equal periods of time decrease equally, it is
obvious that if we wish
to utilise to the best ad-
vantage a limited time, it Y
is expedient to divide it
equally between the two
pleasures. If the whole
of it is spent in the en-
joyment of the first plea-
sure, then at the moment
when the time expires,
much lower degrees of
intensity of sensation of
the first pleasure will have
been reached than the
degrees of intensity of
sensation of the second
pleasure that remains un-
tasted; and vice versd, if
the time available is wholly
allotted to the enjoyment
of the second pleasure.
Now, the initial degrees
of intensity of the two
pleasures being equal, as
also the respective scales
of their decreasing intensity, it is evident that the hedonic
maximum is obtained by apportioning equal periods of time
between the two enjoyments, and thus obtaining equal degrees
of intensity in the last sensations experienced before the expiry
of the time allotted. Graphically the problem is presented
thus : — Let the total enjoyments and the decreasing scale of
enjoyments that may be derived from the fruition of the first
pleasure to the point of satiety, be expressed by diagram IV.,
and those of the second pleasure by the identical diagram V.
Let OX in the first diagram express the time it would take to
produce satiety with respect to the first pleasure, and 01X1 in
D
DIAGRAM V.
34
THE THEORY OF UTILITY
PART I
the second diagram, the time requisite to exhaust the second
pleasure. Let the time allowed for the enjoyment of one or
other, or both pleasures, be equal to O/ in the case of the first
pleasure, and to 0^ in the case of the second pleasure ; that
is, it consists of six equal units. Now, if the time limited is
spent wholly in the enjoyment of the first pleasure, the sum
total of enjoyment will be expressed by the area 0/raY, and
the ultimate degree of enjoyment will have the dimensions of
the ordinate fm. But the area 0/raY is much smaller than
the sum of the two other areas which we obtain, as the expres-
sion of the amount of pleasure enjoyed, if the time limited is
apportioned equally between the enjoyment of the first and
second pleasures. In this case the line en in diagram IV.
and the line c^ in diagram Y. denote the last degrees of
enjoyment obtained, and the totality of such enjoyment is
expressed by the areas OcnY + OlclnlY1 ; and comparing the
area OfmY with the sum of the areas OcnY + O^^Y^ we
perceive at once that the area OcnY is common to both, and
that the comparison is therefore limited to the areas cfmn and
Olc1n1Yr Now, whilst the abscissa is equal in both areas,
cfssOjCj, the smaller ordinate of the second area, viz. c^, is
equal to the larger ordinate of the first area, viz. en ; and con-
sequently against the decreasing ordinates of the latter we can
set off an equal number of increasing ordinates of the former.
Let us now suppose the more complex, but more natural,
DIAGRAM VI.
case of two pleasures presenting different initial degrees of
enjoyment, and different scales of the decrease of enjoyment
during equal periods of time. Let OXY (diagram VI.) denote
CHAP. II
OF THE HEDONIC PRINCIPLE
35
1
DIAGRAM VII.
the magnitude of a first pleasure, and OjX^ the magnitude
of the second pleasure (diagram VII.). The pleasure the
hedonist will taste first will be the one possessing the
greater initial intensity, viz. OY; and he will continue to
indulge in it until its intensity is so far reduced as to be
equal to the initial intensity of the second pleasure. Let
us suppose this to happen when the
first pleasure has been enjoyed for
a period equal to Oa, so that the
ordinate am, which denotes the in-
tensity of the enjoyment afforded
by the first pleasure at the moment
a, must be deemed equal to the
ordinate OjYp which denotes the
initial enjoyment afforded by the
second pleasure. If the time avail-
able is equal to Oa, or less, it will
be entirely spent in the first enjoyment ; if it is greater, its
ulterior allotment must always be such that, at the moment
it expires, there remains no unexhausted degree of intensity
of either pleasure superior to the last degree of intensity
that has been enjoyed ; for if that be the case, the apportion-
ment of the time will not have been so effected as to obtain,
in the given time, the maximum possible sum of pleasure.
Let us suppose, for instance, that the time suffices to extin-
guish the first want ; evidently the hedonic maximum does
not consist in so using it ; for if the time, Ob, is allotted to
the first pleasure, the intensity of enjoyment is so reduced
as to be equal to the fruition of the second pleasure from
Oj to &p the ordinate, In, being equal to the ordinate 51?i1.
Therefore we obtain the hedonic maximum by dividing the
time available in such proportions that the final degrees of
enjoyment in both pleasures always remain equal.1
We shall find this theorem of Gossen again shortly, only
modified in form, in the theory of wants, and repeatedly
further on under analogous forms. We obtain, indeed, the
same problem if, instead of supposing the time for enjoyment
to be limited, we suppose the limit to apply to the stock of
commodities, or to the labour that serves to satisfy various
1 It is very easy to solve this problem graphically. Let the smaller triangle
36
THE THEORY OF UTILITY
PART I
wants indiscriminately ; l and it is still the same problem,
only more complex, that presents itself if we have to indicate
the distribution of a limited stock of means of satisfaction
in a variable period of time, according to a given scale of
probabilities.2
A first corollary of this second theorem is that, if several
pleasures are available, and the time is insufficient to admit of
their all being enjoyed to the point of satiety, the least of these
pleasures should be partially enjoyed before it can be profitable
to enjoy the greatest of them to the point of satiety. In fact,
it is clear that the ordinates which express the intensity of
enjoyment of the greatest pleasure become, at the point of
satiety, less than the initial ordinates of the least pleasure.
Now, as the final degrees of enjoyment must be equal in
order to obtain a hedonic maximum, it is clear that some
portion of the disposable time must be allotted to the least
pleasure before the point of satiety of the greatest pleasure
OiXjYJbe^superposed on the larger "OXY, as in diagram VIII., so that 0^ is
measured off on OY, and OjXj on OX. Then let a new curve be drawn, gener-
Si
Xi I Ri
DIAGRAM VIII.
ated by adding together the abscissae of the two triangles. OX will be pro-
duced, by the addition of OiXj, to X2 ; BD will be produced, by the addition
of EC, to E ; Fn, by the addition of Fnlt to G, and so on. Thus we obtain the
curve ?ftGEX2. The disposable time is now measured along OXX2. Thus,
suppose an interval OX is disposable. Let an ordinate be drawn through X, up
to the intersection with the new curve, at P. From P let a parallel be drawn to
OXX2. This parallel will intersect Y?n?iDX in R, and Y^CXi in S. Then
the ordinates SSi and RRi will bisect the axis of the abscissae, and OS1? ORi will
be the portions wanted. (See Wicksteed's Alphabet of Economics, London,
1888, pp. 59, 60, and 128.)
1 Jevons, op. cit. p. 63, Distribution of a Commodity in different Uses.
2 Jevons, op. cit. p. 77, Distribution of a Commodity in Time.
OF THE HEDONIC PRINCIPLE
37
is reached.1 This corollary is of paramount importance for
the right comprehension of the law that regulates values in
international exchanges.2 Graphically expressed, the demon-
stration is self-evident. Let A be a great pleasure and B a
DIAGRAM X.
DIAGRAM IX.
small one (diagrams IX. and X.). The ordinates of A, e.g.
those erected in a, b, c, etc., become smaller and smaller in the
direction of X; therefore before
X is reached, there must be a
point at which one of them is
equal to the initial ordinate of
B, viz. OjYj, whilst the succes-
sive ones are less than 0^,
however small the pleasure B
may be. When this point of satiety is reached for A,
the time disposable must be apportioned between A and B,
1 Indeed it is impossible that, of several present pleasures, one should be
entirely exhausted, unless all are so ; for the last portion of time or means
destined to the enjoyment of a pleasure might be expended more profitably on
some other pleasure further removed from the point of satiety.
2 Ricardo's theorem : Each nation pays its foreign debt solely by the ex-
portation of the commodity in the production of which it is most efficient, until
the decrease in the value of such commodity in the foreign country renders it
equally profitable to send another commodity, in the production of which it
is efficient in^ a secondary degree ; and of Jthis commodity together with the
former one it continues to send as much as is necessary until the reduction in
value of the same renders equally profitable the exportation of a third commodity,
in the production of which its efficiency is only third in degree ; and so on
until the equation of the mutual demands is attained. ^ (See infra, part ii. chap,
iii. §§ 3, 7, 8.)
38 THE THEORY OF UTILITY PART i
instead of exhausting the enjoyments afforded by the plea-
sure A.1
A second corollary of Gossen's second theorem is that:
the possibility of increasing the sum of enjoyments is con-
ditioned by the possibility of discovering a new pleasure,
however small it may be, or by that of perfecting one already
in existence; and this whether its intensity increases each
moment, or only at certain moments, and whether or not the
period of enjoyment may be prolonged as the rate of decreasing
intensity is slackened.
1 This proposition should, strictly speaking, instead of appearing as a
corollary of Gossen's second theorem, precede it, as an autonomous proposition,
since it constitutes an implicit premiss of such theorem. I have not ventured
to alter the order preferred by the master.
CHAPTER III
OF WANTS
8 1. That Economic Actions are such as are caused by the
Existence of a Want
IN the course of the foregoing discussion of the hedonic
principle, we have implicitly assumed a fact which must now
be verified, viz. that economic science is by no means concerned
with every kind of human actions. In the first place, in
economics, those actions are disregarded which are due directly,
and without any intervention of the human will, to the
mechanic influence of the environment. A man who falls
from a fifth story does not, qud his fall, act economically.
Indeed, in vulgar parlance, the fall would not be considered as
his act. Still the transition from motions effected under the
influence of physical laws to movements that are acts adjusted
to a preconceived end, is so gradual, that no well-defined line
of demarcation can be drawn between them. Besides actions
of this kind, we must exclude those that are unconscious, such
as most of the organic processes and reflex acts. The human
body performs a great number of acts that tend to adapt it
to new conditions in the environment : inspiration is followed
spontaneously by expiration ; the pulsations of the heart and
the digestive processes are accomplished unconsciously, and
are independent of our will, even when they cause us pain.
The reason why these two kinds of actions are outside the
range of economic subjects, is that the psychological law of the
minimum of action, or hedonic postulate, cannot be manifested in
them. Only those actions accordingly are economic which are
40 THE THEORY OF UTILITY PART i
due to the desire to rid oneself of pain, or to lessen or avoid
pain, and which are the fruit of our consciousness and will. This
sphere of human activity, which is certainly very limited, and
possibly altogether non-existent, in the earliest stage of infancy,1
and scantily developed in savage populations, widens out enor-
mously with every progressive step in civilisation, and with
every intellectual and emotional advance in the individual ; so
that the duration and intensity of individual and collective
life are increased by the perfected and multiplied adjustment
of acts to ends.
The sphere of economic actions is however still too broadly
defined when we so designate all actions that are due to the actual
or prospective existence of a pleasure or pain ; for in reality
that sphere comprises only one species of this kind of actions,
viz. such as are caused ly the existence of some want. Now a
want2 is the desire to dispose of means deemed to le adapted to
remove a painful sensation, or to guard against it, or to excite
or prolong a pleasurable sensation. If we say that Titius
wants to eat, we mean : that he feels a certain pain called
hunger ; that he believes in the existence of means fitted to
remove that pain, viz. food ; and that he desires to avail him-
self of such means.
It is a mistake to identify, as is often done, the want
which is the desire for an instrument or means, with the
painful sensation which is only one of its causes. In
order to constitute a want, the prior existence actual or
prospective of a pain is certainly necessary ; but that alone
does not suffice : another condition must concur, viz. belief in
the existence of means of alleviation. A painful sensation
which we were convinced that no means could alleviate, would
give rise to no want ; nor would the conception of some pleasure
which we believed to be reserved to some other species of
beings than ourselves. A want implies therefore the con-
1 Many physiologists doubt, for instance, whether a newly-born infant is
susceptible of feeling pleasure or pain, owing to the imperfection of its nervous
system ; those of its acts which seem to us indications of pain are reflex.
2 "Want " is the nearest English equivalent of the term used by the author :
bisogno. But, owing to the ambiguousness of "want," which, besides the desire
for something needed, expresses also the mere conception of its absence or
deficiency, I have been sometimes obliged to render bisogno, in this chapter and
elsewhere throughout this treatise, by "need" or "desire." — Tn.
CHAP, in OF WANTS 41
currence of at least two conditions : 1st, some pain must exist
in our consciousness,1 no matter whether such pain be reason-
able or unreasonable in the opinion of others, or whether it
may seem real or imaginary to them ; 2nd, there must be the
knowledge of some means or instrument, the use of which
would diminish or suppress the pain in question; or at all
events there must be the belief, even though erroneous in the
opinion of others, that such means or instrument does exist.
Given these conditions, there is begotten the want of such
means or instrument, i.e. the desire to dispose, or avail oneself,
of it. This is an elementary mode of being of the mind,
which cannot therefore be denned. It is in its turn the cause
of a series of acts intended to satisfy it, and it is these acts
alone that form the subject-matter of economic science ; inas-
much as by egoistic individuals (or by the homo ceconomicus)
they are performed in accordance with the hedonic principle,
that is, at the minimum possible cost that circumstances admit
of.2 Just as the want must not be confounded with the pain,
which is one of its causes, so too we must avoid confusing the
satisfaction of a want with the pleasure (or cessation of pain)
which is its effect. This is mentioned, not as a warning against
speaking elliptically, but in order that the ellipsis, being noted,
may not induce any misapprehension.
§ 2. Of Hedonic Mensuration applied to the various Degrees of
Intensity of a single Want, and to the Comparison of the
Degrees of Intensity of several Simultaneous Wants.
Although our wants are neither pleasures nor pains, but
have pleasures as their effects, if satisfied, and are begotten by
1 It is a contradiction in terms to talk of "unconscious wants," or "uncon-
scious pains," for the sensation of pain is of the very essence of consciousness
(A. Bain, The Emotions and the Will, 3rd ed. 1880, Longmans, p. 540).
2 Instead of " egoistic individuals," we may also say : "individuals who act in
conformity with their self-preservation " ; since this end is gained by not applying
to the satisfaction of a want more labour than it requires ; by not satisfying it at
all if it is not hedonically worth while doing so ; and by preferring, in the case
of several wants, to satisfy the one that is hedonically paramount. The labour
required for the satisfaction of a want is a consumption of vitality, and therefore,
cceteris paribus, a lesser development awaits him who spends more effort or labour
for the sake of equal satisfactions, and natural selection eliminates him in the
long run, as a being that realises fewer conditions of vitality.
42 THE THEORY OF UTILITY PART i
pains, nevertheless we can apply the hedonimetry we have
already investigated, in its completeness, to wants. Nothing
has hitherto been effected by any other means. The attempt
has been made to find a quantitative standard of wants in
the metric quantities1 of the several commodities, of every sort
or kind, which are consumed by an individual or by a nation,
within a given time. Let us call this quantity the requirement
of an individual, or exceptionally, his demand? as an equivalent
of the German Bedarf, or of the Italian fablisogno. We
shall therefore understand by requirement the metric quantity
of the objects consumed, in a given time, by an individual, or
their money value. His annual expenditure is divided into so
many pounds for bread, so many for meat, and so many for
clothing, house rent, etc.
Now what these data are supposed to render possible, is
the measurement of the intensity of our wants. If a man
spends £175 on food, £50 on clothing, £45 on his lodgings,
£37: 10s. on firing, and £20 on drinks, it is supposed that
the intensities of these several wants are to each other in the
proportion of 175:50:45:37-|-:20. This, however, is not
the case, because the amount spent, say, on food depends,
not only on the price of food, but also on the price of every
other commodity the man buys ; nay even on the prices of
those objects he abstains from buying because, for the time
being, they are too expensive. A case in which the know-
ledge of our requirements might be of use to us in other
respects, would exist if all the commodities we consume were
obtainable gratuitously. In this case our requirement would
coincide with our demand, at a price equal to zero. We should
then be acquainted with a most important point of the
demand curve of every individual, i.e. of the quantity of
commodities he would appropriate, if he had nothing to do
but to take them ; but we should still be unable to gauge
the comparative intensity of his desire, say, for meat and for
beer ; we should only know that he consumes so many pounds
of meat and so many gallons of beer, in a certain time.
1 e.g. by Hermann, op. cit. ii. pp. 80, 81 ; iii. pp. 107, 108.
2 The term demand possesses in economics the special meaning of the t/i'ftiiftfy
of a given commodity that is required at a given price, and consists therefore of
the quantity of the commodity offered by way of price. "We shall return to this
subject in the sequel (part ii. chap.'ii. § 1, note, and chap. iii. § 1).
CHAP, in OF WANTS 43
Hedonimetry, however imperfect, carries us a step further.
We must distinguish between the quantitative variations of
one and the same want, and the quantitative differences that
exist between several distinct wants. In fact, on the
one hand, in respect of one and the same want, we may
distinguish various degrees of strength, as a greater or
lesser desire for any given satisfaction, such as a greater or
less desire for water, or warm clothes, etc. On the other hand
we may compare the various degrees of strength with which
different wants make themselves felt at a given moment, or in
a series of moments, in the same individual ; as for instance the
craving for food with the need of sleep, the need of recreation,
etc. Now, the quantitative differences between the degrees
of one and the same want are measured in accordance with
the quantitative differences in the sensation of pain which
is the cause thereof, until they are satisfied; or in the
sensation of pleasure which is the effect thereof, when they
are extinguished. Thus, for instance, we conceive the magni-
tude of the several degrees of the desire for food to be propor-
tionable to the magnitude of the several degrees of the feelings
of hunger which are the cause thereof, or of the several degrees
of the pleasure afforded by their appeasement. Consequently
we may now apply to wants the reasoning set forth
with reference to pleasures and pains (chap. ii. §§ 5, 6).
Supposing any given want, having at a given moment and for
a determinate individual, any determinate initial strength, it
is a fact supplied by daily observation that, before being ex-
tinguished by possession of the commodity which was its
object, it passes more or less rapidly through a series of
indefinite gradations of decreasing strength, corresponding
with the decreasing variations of its cause. If the original
strength or magnitude of a want is expressed, as in diagram
XL, by an arbitrary numerical index, say 10, or graphically
by an ordinate of arbitrary length (A101), the successive
partial assuagements of this same want will cause it to
assume successively the dimensions designated by 9, 8, 7 ...
to zero, and denoted graphically by ordinates decreasing
until they coincide with the abscissa (A202, A303, . . . AnOn).
The various strength of several wants is expressed in exactly
the same manner. A number of such wants may be ordered
44
THE THEORY OF UTILITY
PART I
in accordance with the strength they possess, at a given
moment, for any determinate individual. This scale of the
urgency of wants will be founded ultimately on the scale
10
Ai
9
8
AL>
7
Ai
6
A.,
5
Aa
4
Af n
As
JL
Oi O2 O3 O4 O5 Os O7 Os
DIAGRAM XL
O9 Oi
constituted by the pains that beget the wants, or that would
have to be suffered if the wants remained unsatisfied. Let us
express, as in diagram XII., by any index, say 10, or by any
ordinate, say Afl^ the urgency of the first want in this
Ai
10
As
B
B]
B
As
8
33
'•
Ci
s
A^
•
B3
"
Cj
•
Dj
7
A.-,
6
Bj
8
c.
c
Dj
8
Ej
G
A,
•''
B;
•'
c,
•''
D,
f
r
5
F]
•'•
A;
:
B«
4
C;,
I
DI
4
Ea
'
F:'
1
G.
•i
A~
8
37
t
C6
:{
D,
8
E,
|
Fa
8
Gj
8
HiH _
A,
A;,,
1
Bs
B.
I
\
C7
Cg
I
i
Dfl
D:
-j-
Es
E;;
1
F!
F;,
8
1
G;;
G;
•J-
H2jjLihl
K, iju-niL HIM
DIAGRAM XII.
scale, viz. the amount of pain that must be suffered if it be
not satisfied.1 The aliquot parts of this ordinate, viz. the
A, A. T^T. etc., thereof (AtOl, Af01, AtOv . . . A^) will
be equivalent to the successive intensities of the want in
question, consequent on its progressive satisfaction. Let the
initial urgency of the second want be expressed by a second
1 The axis of the abscissae is to be considered as designated once for all by
OX, even if in some diagrams these letters are omitted, and tin- a.\i> of the
ordinates by OY. In diagram XII. at foot of the columns of A, B, C, etc., 01( O2,
03, etc., are omitted.
CHAP, in OF WANTS 45
ordinate having 9 as its index (BjOJ, and divided into aliquot
parts likewise equivalent to the successive intensities of this
want. In the same way, let a third want be expressed by a
third ordinate (C103) having 8 as its index, and divided into
aliquot parts with decreasing indices (C003, C3O3, . . . Cg03).
And let this process be carried on to the representation of a
tenth want (L1010) having as its index 1, and consequently
supposed to be of such magnitude as to be satisfied with
what will diminish any one of the preceding wants by one
degree of intensity. The ordinate (M00n), having zero as its
index, is non-existent, and expresses a want already satisfied,
or not yet felt. Given this scheme of the various degrees of
intensity that every want passes through before it is ex-
tinguished, and of the scale of intensity of several wants at a
given moment, it follows that if an individual has at his
disposal a determinate quantity of means of satisfaction
which can be applied to several uses (for instance a certain
amount of money),1 he will take care to extinguish first the most
urgent want (the want A of diagram XII.) and will direct to
this end the employment of the means at his disposal. How-
ever, he will not care to extinguish this most urgent want
completely, before providing for the satisfaction of the second
and ulterior wants ; for the first want is not more urgent
than the second, except within determinate limits, and more
precisely until the first degree, denoted by A in diagram XII.,
and having 10 as its index, is satisfied. In fact, as soon as
the first want is satisfied to this extent, the second becomes
equally urgent ; so that if the means still available were
employed exclusively in satisfying it, so as to reduce it to
an intensity of, say, 8 degrees (at A3), there would remain
unsatisfied a want now surpassing it in urgency, viz. the
second, having 9 as its index (at BX) ; so that the hedonic
postulate would have been transgressed. Therefore when
the first want A is reduced by the employment of a portion
of the available means to an intensity equal to that of the
second (A2 = BX), so that both come to have the index 9, the
hedonist, or homo ceconomicus, must apply his means in
equal measure to the satisfaction of the first two wants.
1 Here, for a first approximation, abstraction is made from the final degree
of utility of money, i.e. the unitary prices are considered as being all the same.
46 THE THEORY OF UTILITY PART i
However even then he will not persevere in this to the complete
extinction of such wants ; for when the first two are reduced
to the intensity indicated by the index 8, i.e. the first by two
degrees (A^ and A2) and the second by one degree (B^, the third
want will equal them in intensity (C1), and must thenceforward
be satisfied pari passu with them, for the same reason that
previously called for the simultaneous satisfaction of the
second want. If the means that are still disposable suffice,
the first three wants will be satisfied until they are reduced to
the intensity denoted by the index 7 (A4 = B3 = C2), when the
fourth want (Dx) will claim attention ; and so on.1
It follows, that at whatever moment the disposable means
are exhausted, the wants that have been satisfied therewith have
all Equal Degrees of Intensity, and that these are the Greatest
experienced by the individual at that moment. In this proposi-
tion we have an economic theorem which is nothing more than
a formal variation of Gossen's second theorem of hedonic
maxima. In this shape however — which is the more common
one — it goes by the name of Gossen's or Jevons's theorem of
final degrees of utility.2 In order to avoid misapprehension, it
may be expedient to paraphrase, and to add a few comments
on, it. It is clear that it could also be formulated by the
proposition : that the wants that remain unsatisfied after any
given quantity of means has been employed in appeasing
them, possess either equal or inferior degrees of intensity.
If the unsatisfied wants are among those which have been
partially appeased, their degrees of intensity are now equal ;
if, on the other hand, they are such as had not yet been
taken into consideration, their degrees of intensity are in-
ferior to the minimum degree of intensity that the dis-
posable quantity of means sufficed to satisfy in the case of
the other wants. The scale formed by the intensities of the
1 The method of using numerical indices instead of curves is due to Menger,
and is extremely useful to all who are puzzled by geometrical diagrams or
analytical expressions. It can be adapted to nearly any purpose that is sub-
served by curves.
2 Gossen, op. cit. p. 33: " Wenn (des Menschen) Krafte nicht ausreichen
alle moglichen Genussmittel sich vollaus zu verschaffen, muss der Menscli sich
ein jedes soweit verschaffen dass die letzten Atome bei einem jeden noch fur ihn
gleichen Werth haben." Jevons, op. cit. p. 65: "The final degrees of utility
in two (or more) uses of the same commodity must be equal."
CHAP. Ill
OF WANTS
47
various wants, arranged in order of decreasing initial magni-
tude, will never present in reality the symmetry shown in
diagram XII. We may suppose that a first want has 10 as
its index, a second 6, and that successive wants have still
lower indices, say between three and one. By marking only
the upper extremities of the ordinates corresponding to these
indices, and joining them by a line, we shall have the curve
AL of diagram XIII. It may be that the means disposable
will only suffice to satisfy the first and second wants as far as
the fifth degree (line MN). Both these wants will then have
equal degrees of intensity ; whilst the others, which have not
been even partially satisfied, continue to have degrees of
intensity (between 5 and 1) inferior to the lowest degree
DIAGRAM XIII.
(6) that the mass of disposable means sufficed to satisfy.
We might also have supposed this mass to be so small as to
suffice only for the extinction of a couple of degrees of the
first want. The theorem might still be expressed in the
same way ; only then the equal degrees of intensity would
be the eighth degree of the first want, which is equal to
itself. As the satisfaction of several wants is always effected
in such a manner as to equalise the degrees of intensity of
those wants which, though not extinguished, are partially
satisfied, it may be said to proceed in accordance with equal
indices, or with lines parallel to the abscissa.
If the mass of disposable means sufficed to extinguish
completely all the wants existing at a given moment, then
also the degrees of intensity of all remaining wants would
be equal, for those degrees would be zero in all cases alike.
48 THE THEORY OF UTILITY PART i
§3. Of an Absolute Scale of Intensity and of the Law of the
Elasticity of Wants
The scale of wants we have hitherto considered is relative
to any given moment and any given individual ; in other
words, according to the moment and to the individual, the first
place, i.e. the greatest intensity, may be attributed to any one
want, and the last place to any other.
We have now to inquire whether there exists any scale of
the absolute urgency 1 of wants. All that can be stated with
certainty on this point is, that for a few groups of wants there
is a scale of precedence, in the sense that, until certain wants
have been satisfied, no others make themselves felt. Whilst
the scale we have considered above applies to the intensity of
wants existing simultaneously, the one we now refer to applies
to the genetic succession of wants. Sociological history reveals
to us a few degrees of that scale, and so does the study of
statistics. As usual, psychological analysis and the data of
physiology carry us further. On this basis Jennings has suc-
ceeded in formulating a law almost as important as that of
the decrease of protracted enjoyments. Let us distinguish two
series of sensations : let us place on one side those received
by us through the medium of the so-called five senses, and on
the other those we receive through the medium of the nerves
pertaining to other parts of the body, and let us call the
former special sensations, and the latter common sensations.
To the category of common sensations will belong in particular
those of weight, resistance, temperature, hunger, thirst, stimula-
tion, etc. Now, in conformity with this division of human
1 The term "absolute scale " signifies, that the scale we are now considering
exists, making abstraction of a greater or lesser part of the conditions to which
the former is subject. The absoluteness is therefore relative. The former scale
was relative to a given individual, i.e. to a subject the logical content of which
is maximum, while the sphere is minimum. The scale we are at present dealing
with makes abstraction of the conditions either of time, or of social position
and civilisation, or of individual idiosyncrasies, or perhaps even, according to
the opinion of some, of those of sex and age of the individual ; i.e. it relates to
a subject having a lesser logical content than the former, but a larger sphere. A
number of errors arise owing to its not being always perceived : (1) That the
term "absolute" is only the negation of a determinate relativity, so that it
must be stated with reference to what condition the absoluteness is predicated or
postulated ; (2) that there may be infinite degrees of absoluteness.
CHAP, in OF WANTS 49
sensations, we shall have a division of wants and of things
that are the objects of such wants, and we shall designate as
primary wants those corresponding to common sensations, and
as secondary wants those corresponding to special sensations.
This classification will coincide in the majority of cases with
the one usually adopted, — but which lacks any rational basis,
— of necessary wants and luxurious wants ; whilst, according to
our classification, no doubt can ever arise as to the category to
which any satisfaction, and the object that is instrumental in
producing it, belong. The following principles are deduced
from the said classification : —
1st. Primary wants (corresponding with common sensa-
tions) may be satisfied without any hedonic loss, even when the
secondary wants are not satisfied ; on the contrary, no enjoyment
is derived from the satisfaction of secondary wants, or the latter
are not even realised, or the enjoyment is much less than it
otherwise would be, if the primary wants are not satisfied in
large measure, or completely. For instance, every one is dis-
posed to satisfy his hunger, or thirst, or to rest, or to move, etc.,
even without the concomitant satisfaction of the senses of
hearing, smelling, or seeing ; on the other hand, the desire to
gaze on statuary or flowers soon vanishes under the influence
of hunger, thirst, cold, excessive heat, or sickness. In other
words, the satisfaction of the common senses must precede the
satisfaction of the special senses.1
2nd. The law of the decrease of protracted enjoyments
differs somewhat, according as we have to do with primary or
secondary enjoyments ; for the satisfaction of secondary wants
is less affected by quantitative variations in the objects causing
satisfaction than is the satisfaction of primary wants. With
regard to primary wants, one might apportion the quantities
of primary commodities according to the respective purposes
they subserve, with the same exactness in the case of man, as
in the case of animals that are reared for determinate pur-
poses; but this does not hold good with regard to any
secondary satisfactions.
1 This explains, e.g., why the liberal professions are poorly paid in countries
where the number of persons is limited who possess a competency for the satis-
faction of their primary wants, and vice versa. Owing to Jennings's law, this
fact becomes an excellent semeiologic criterion of the national wealth.
E
50 THE THEORY OF UTILITY FART i
3rd. TJie satisfaction of one primary want cannot, as a
rule, compensate for the non-satisfaction of another primary
want. An increased ration of food will not quench thirst, nor
make up for the want of rest, or coolness, or warmth, and vice
versd. On the other hand, the satisfaction of one special sense
often compensates for the non-satisfaction of another, to the
extent of making us forget it : for instance, the enjoyment of
music may make up for the want of some other artistic
enjoyment.1
Probably, however, what so far is known with most
certainty in this connection is that the absolute scale of wants
obtained by induction is very different from what, a priori, we
should expect it to be. Thus for instance, a priori, most people
would probably assign a comparatively remote place in the
scale of wants to the desire for ornaments, which appears to us
a form of luxury, and that of a moral or intellectual order.
Instead of this however, facts seem to demonstrate that this
want precedes by a long way certain others, the satisfaction of
which is much more conducive to the preservation of the
individual and of the race. That an absolute scale of wants
does exist, albeit its nature is very imperfectly known to us,
appears from a very simple consideration : suppose, in fact,
an individual at any given moment, whose wants accordingly
constitute a determinate curve ; and let his first want in the
scale of intensity be a, the next b, and so on. If we now suppose
that this individual lacks the means of satisfying some one of
these wants, after a longer or shorter series of moments, the
curve of intensity of his wants will have been sensibly modi-
fied. The first want will no longer be a, nor the second I.
The longer the series of these moments is supposed to be, the
more will the curve, through its successive modifications, tend
to assume a shape approximately uniform for every individual,
being constituted by few elements similarly graduated. Prob-
ably the first places will be occupied by the want of food,
drink, heat : in a word, by the series of wants relating to the
preservation of the human organism ; probably, too, a large
1 Jennings, op. cit. pp. 100-104. Within certain limits, however, primary
commodities may also be substituted for one another : more food may to some
extent make up for less warmth and less sleep. In the Franco-German War of
1870 the German soldiers were always commanded by their officers, when halt-
ing, to eat first, and to sleep afterwards if any spare time remained.
CHAP, in OF WANTS 51
series of wants that existed before will have entirely dis-
appeared, as the painfulness of the non-satisfaction of some
other wants is so great as to render us insensible to the pain-
fulness of these.
The hypothesis we have suggested actually occurs in the
case of besieged cities and wrecked vessels. It seems however
that the absolute or fundamental curve of wants contains only
a few items, and that as soon as the means suffice to satisfy
them, the original or natural curve, as we might justly call it, is
differentiated into as many diverse curves as there are in-
dividuals. Possibly, between the original curve common to
all, and the multiform individual curves, there exist inter-
mediate curves that are common as regards a particular race,
or sex, or age, or with respect to some other particular prin-
ciple.1 There is only one way of conceiving absolute differ-
ences of magnitude in our wants ; and though it cannot
be expounded without reference to matters which will be
discussed in the sequel, it may be advisable to indicate it at
this stage.
Suppose an individual expends an equal quantity of labour
in the production of each commodity he requires. Such unit
of labour will yield determinate quantitative results as regards
the several commodities, for instance : m of food, n of clothing,
o of shelter, and so on. Supposing the unit of labour to be
very small, we shall call the corresponding quantity of com-
modity obtained thereby, the marginal efficiency of a unit of
pain or toil ; or speaking elliptically, we call these diverse
quantities of commodity units of commodity. Now, each of
these various units of commodity has a final degree of utility ;
and the magnitude of these degrees of utility is the exact
measure of the magnitude of each want. Graphically, we
may imagine equal segments of an abscissa, denoting equal
portions of labour, as regards their painfulness for the same
individual, and applied to the production of different com-
modities. On each segment of the abscissa is drawn per-
pendicularly a rectangle proportionable to the utility yielded
1 With few exceptions, the wants of a child cannot be the same as those of
an adult ; hence, too, the scales relating to classes of youthful and adult
individuals, i.e. the comparatively absolute scales, must vary considerably.
The same applies to every other class scale.
52 THE THEORY OF UTILITY PART i
by the quantity of commodity resulting from a unit of labour.
If the segments of the abscissa are shortened, the rectangles
are reduced until they become ordinates. Of these some will
be infinitely long, others again will be short. The scale
they form will be the one we are seeking.
The fact is that we have hardly any definite knowledge
on the subject, with the exception of the above-mentioned
law of Jennings ; and that Block's so-called law of abstention,
according to which, " given a reduction of the available
means of satisfaction, we dispense first with the satisfaction
of the less urgent wants, and then with that of the more
urgent ones," constitutes a vicious circle; inasmuch as we
cannot construct an absolute scale of the urgency of wants,
since the criterion for determining whether a want is more or
less urgent is furnished by the fact that we dispense with its
satisfaction sooner or later.1
The practical importance of studies that should reveal to
us what wants are satisfied in a lesser measure than before,
and what other wants are no longer satisfied at all, when the
means of satisfaction are reduced; and on the other hand
what wants are satisfied in a fuller measure than before, and
what new wants are superadded, in the converse case of an
increase in the means of satisfaction, would be incalculable ;
for we should then possess the key to all the fundamental
questions connected with the theory of imposts on articles of
consumption ; in other words, we should have a law of the
elasticity of wants.
1 Our statement that Block's law of abstention implies a petitio principii, is
intended, not as a stricture, but as an explanation of its meaning. In fact, if
it expresses a truth derived from the observation of facts, and does not therefore
relate to the future, if, i.e., a scale of wants has been framed as the result of
historical study and statistical observation, it is clear that it does not constitute
a vicious circle. As regards the future, it applies only, if and when it has been
ascertained A POSTERIORI, that an individual, or a people, in view of the restriction
of the means of satisfaction, has dispensed with the satisfaction of the want m
or n. In that case we are entitled to say, that in the hedonic estimation of the
said individual or people, the wants m and n are less urgent than the others a
and b. Moreover, within the limits of the data so ascertained, we may say that,
all the other conditions remaining unchanged within a given period, if the
means increase, we shall resume the gratification of the wants m and n in the
inverse order to that in which it was retrenched, and that if at a future period
the means should be again reduced, we may predict a diminished consumption
of the commodities that satisfy the wants m and n.
CHAP, in OF WANTS 53
What we are able to say at present, on the basis of in-
ductive studies, is the following : l —
1st. Suppose that in a country, not being a close
market (that is, possessing extensive commercial relations with
other countries), the means of payment increase2 in such
measure as greatly to extend the limits set to the satisfaction
of wants in the solvency of purchasers, and to render possible
an increase in the demand for commodities, although their
prices remain stationary, or even undergo a rise ; in that case
a determinate series of wants will be satisfied in a larger
measure than before, and a new series of wants will claim
and receive satisfaction ; i.e. we shall have an expansion of
wants according to a determinate order. Suppose, on the
contrary, a diminution of the means of payment, so that the
limits set to the satisfaction of wants in the solvency of pur-
chasers are restricted, and the demand for commodities is
reduced ; in that case a determinate series of wants, differing
from the previous series, will be satisfied in a lesser measure
than before ; i.e. there will be a compression of ivants, or a cur-
tailment of their satisfaction, according to a determinate order
differing from the previous one. In other words : The positive
expansion of wants is, as a matter of fact, different from the
negative expansion. Whether this would be so even in the
case of the homo ceconomicus, cannot be deduced from the
researches hitherto made, owing to the manner in which
they have been carried on ; but it seems probable that it
would not be so.3
1 Viertelj. f. Volksw. u. Kulturg., 1868, vol. iii. pp. 127-165 ; vol. iv. p.
121, "Wahrung und Preise, Julius Faucher.
2 If the country is a close market, we may suppose the efficiency of labour
to have been increased by new methods of organisation, by the growth of know-
ledge, or by technical progress ; or else to have deteriorated by reason of some
accident of the environment, say a deviation of the gulf-stream.
3 At first sight it is incomprehensible how an expansion of wants can occur
in a different order from the contraction of the same as regards a homo ceconornicus,
if, as we must do, we exclude the hypothesis of error in his hedonic calculations
when he extends his enjoyments in a certain order, as his means increase. The
explanation of the contradiction between the historical, or statistical, or other-
wise inductive, fact, and the conclusions of the a priori calculation or reasoning,
may be obtained in various ways : (1) The historical, statistical, or otherwise
inductive observation may be vitiated by error. This may easily be the case,
for as yet the subject has been scantily investigated. (2) It may be that the
process of observation is extended to men in whom the characteristics of the
54 THE THEORY OF UTILITY PART i
2nd. The empiric scale of positive elasticity for categories
of wants seems to be, in an increasing series, the following :
the desire for nourishment has a lesser capacity for expansion
than the desire for clothing, and the latter has a lesser force
of expansion than the desire for shelter.
3rd. In the first category the increasing series presents
the following order : salt, grains and common vegetables, fruit
and fine vegetables, meat, dairy produce, eggs, salt meat, fish,
stimulating beverages, groceries, tobacco. Negative expansion
is different, presenting minimum degrees for salt and tobacco ;
in the decreasing order of negative expansion follow alcoholic
drinks, coffee, sugar, groceries, vegetables, meat.
4th. In the category of desires for clothing, negative expan-
sion is much less than in that of desires for nourishment. The
conception of an absolute scale of wants, which is not without
a certain amount of truth, has nevertheless, in its present
imperfect condition, probably given rise to more economic
errors than sound principles. More especially it has resulted
in a distinction between necessary wants and superfluous wants,
or luxuries, which is untenable in nearly every shape in which
it has been presented. It is to be observed above all, that a
want which might be deemed a luxury for one individual, is
not necessarily such for another, since one individual differs
from another even in his physiological conformation. Thus,
for instance, the skin of a peasant or labourer is not, from a
homo ceconomicus are neutralised by other characteristics, so that the theory
must be understood secundum quid, and the observation applies secundum
aliud. (3) It may be that the theory of the homo ceconomicus is incomplete or
erroneous. (4) It is possible to conceive of a reconciliation between theory
and observation on these lines : Suppose that the scale of wants of the homo
ceconomicus, at a given moment, is constituted in order of importance by the
wants a, b, c, d, and that subsequently he is enabled to satisfy new wants, and
does so in the order in which they stand, e, f, g, h. But now, since he has
tasted the satisfactions c, f, g, h, and has become accustomed to them, his
absolute scale of wants for the future may have been modified so as to be con-
stituted by b, c, f, g, a, d, e, h. In other words, the commodities lie has con-
sumed and the interval that has elapsed between the time when his means wnv
less and the time when they became more, operate as alterative factors on the
scale of importance of his wants. Now, suppose a diminution of his means to
supervene : evidently he will act in accordance with the new hedonic sc<i!< in
the retrenchment of his enjoyments. The divergence between theory and
practice would therefore arise from the fact that the observations refer to
different times, whilst the theory supposes the processes to be accomplished at
the same moment.
CHAP, in OF WANTS 55
physiological point of view, the same as the skin of an indi-
vidual belonging to the upper classes ; and the same remark
applies to various organs whose functions furnish quantitative
results so different, as to constitute qualitative differences both
in the functions and in the organs. Whilst, for instance, the
desire for intellectual or emotional recreation may be luxuries
for the labourer, the same may be wants of the first order for
the brain-worker ; so much so that to deprive him of them may
be to unfit him for his wonted labours.
§ 4. Of the Variety and Progression of Wants
Observation furnishes us with a law of the indefinite
variety and progression of wants, for which two causes may be
assigned : 1st. Our organs are impaired by inactivity, and
yet wasted by use : hence a series of painful sensations and a
series of wants ; 2nd. The environment in which we live is
constantly undergoing modifications which react on our sensi-
bility, causing us pain and compelling us to a continual labour
of adjustment. A state of satisfaction is incompatible with
anything save a state of insensibility ; and thus, while life
lasts, such a state can only be transitory and momentary. The
satisfaction of grosser wants quickens our sensibility and gives
rise to wants that are more refined. After having made
provision for present wants, we begin to think of remoter
ones. The progression of wants is therefore indefinite ; more
especially as they are directed to the acquisition not only of
direct means of satisfaction, but also of instruments for the
more abundant, or speedy, or perfect production, at the same
cost, of direct means of satisfaction ; and this species of wants
has no other limits than those of the inventive capacity of the
human mind.1 A consequence, or rather a paraphrase of the
1 H. Spencer, loc. cit. p. 158. Originally only the realisation of an end was pleas-
ing; as however this usually necessitated the previous realisation of means, this in
turn has come to be a pleasure, though it is often far removed from the ultimate
object for which the means was realised. " During evolution there has been a
superposing of new and more complex sets of means upon older and simpler sets
of means ; and a superposing of pleasures accompanying the uses of these succes-
sive sets of means ; with the result that each of these pleasures has itself eventually
become an end." See the analysis of the instance given of the merchant who
thinks of making money, and enjoys making it, though it is only a means for
the satisfaction of other wants.
r.o THE THEORY OF UTILITY PART i
foregoing proposition, is that the means of satisfaction in
general can never be superabundant, though a determinate kind
may be so ; that is, the available quantity thereof may be
in excess of the corresponding need.
§ 5. Of some Classifications of Wants in respect of their
Qualities
Wants may be classified, in respect of quality, in an infinite
number of ways ; and to each of such classifications of wants
corresponds an identical classification of means of satisfaction.
Whilst one of the most fruitful classifications of wants has
just been indicated in the preceding section, that namely of
wants having means of direct satisfaction as their objects, and
wants having as their objects instruments for procuring such
means of satisfaction, the great majority of the classes of wants
and means of satisfaction thus obtained possess no economic
importance. As, in the formation of such classes or categories,
we have to do with laws of fact, which only subserve our
purpose inasmuch as they supply premisses for economic
theorems, we shall do well to ignore all such as do not do so.
Such are above all the divisions of wants or means of satisfac-
tion derived from jurisprudence or from ethics. Thus the
division (derived from Eoman Law) of things into fungible and
non- fungible, and the corresponding division of wants, are
altogether irrelevant ; as is also the division of wants into
public and private ; into individual and collective, singular,
particular and universal ; into wants that are common in
respect of place or time and wants that are common to society ;
into human and animal wants ; and into positive and negative
wants. If any one of these distinctions should at any time
become relevant, it can then be drawn briefly; for all the above
and a hundred other possible distinctions are comprehensible
at once. At present, rather than to dwell on the commonest
classifications of wants, it behoves us to be on our guard
against some of them, the importation of which into economic
discussions has given rise to grave errors. Thus, for instance,
there is no such thing as the distinction between natural and
artificial, or between real and imaginary wants, or as the
correlative distinction between the corresponding means of
CHAP, in OF WANTS 57
satisfaction. In accordance with the usual practice we defer
discussion as to which divisions are fallacious, and which are
prolific of inductions, until we come to treat of the means for
the satisfaction of wants ; for we shall then deal with those
points in connection with the divisions that are proper only
to such means.
CHAPTER IV
OF UTILITY AND THE CLASSIFICATION OF COMMODITIES
§ 1. How Commodities are commonly Characterised
THE means for satisfying our wants, whatever their nature
may be, are termed commodities. Having already discussed
at length the characteristics of the conception want, and
having found that it presupposes : 1st, The existence of a pain
present or prospective ; 2nd, the consciousness, whether warranted
or erroneous, that there exists a means for alleviating it ; and
3rd, the desire to dispose of this means, we have now to
determine the essentials of the conception commodity in
economics. It is commonly held that the concurrence of four
conditions of fact is necessary to constitute a thing a commodity,
viz. : the existence of a want, the existence of a thing endowed
with such properties as fit it to be the cause of the extinction of
the want in question, the possession of the knowledge of these
properties, and lastly the accessibility of the thing itself. In
fact, it is evident that a thing can only be a means of satis-
faction inasmuch as a want exists, and that the disappearance
of the want involves the disappearance of the property of being
a means of satisfaction previously attributed to the thing. It
is also obvious, that if a thing possesses the property of
extinguishing a want, that thing is a commodity for him who
is aware of that property and who experiences the want.
Finally, it cannot be doubted that substances contained in the
stars, though they may possess the physico-chemical properties
which would render them capable of satisfying human wants,
are not commodities, because they are inaccessible, and that, in
CHAP, iv THE CLASSIFICATION OF COMMODITIES 59
the same way, all things situate beyond our control are not
commodities.
But though, roughly speaking, the essentials which consti-
tute a thing an economic commodity may be so stated, a much
subtler definition of them must be given if we wish to speak
with scientific accuracy. In fact, — only to point out two
defects of the above definition, — we may remark with refer-
ence to the second requisite, that besides the things that are
commodities because they possess such physico-chemical
qualities as are capable of modifying our painful sensations,
there are a large number of commodities which do not possess,
but are wrongly supposed to possess, such qualities. Moreover
it must be observed that, regarding those four essentials as a
whole, they are insufficient to constitute a thing a commodity.
Thus, for instance, judged by this criterion, is drinking water a
commodity, or is it not ? Given the existence of an individual
who is thirsty and the accessibility of water, we must, in
conformity with what has been predicated, reply affirmatively.
Nevertheless it is obvious, that whilst that will be true, as
regards the first, second or third pint, it is untrue of the one-
millionth as regards the same individual. The same applies
to heat, which is a commodity up to a certain degree, but
beyond that becomes an evil, or discommodity, and to food,
which is a commodity up to a given quantity, but which,
partaken of in larger quantities, becomes useless, superfluous or
hurtful.
It is obvious that the said four requisites are insufficient to
determine the essentials which constitute a thing a commodity,
if indeed we should not rather consider them as altogether
erroneous, seeing that they do not solve the true difficulty
of the question. The definition makes abstraction of the
quantities of things as they exist, or as they are thought or
spoken of, as also of the further fact that wants, in relation to
which certain quantities of things are or are not commodities,
likewise possess quantitative characteristics. It will therefore
be well to depart somewhat from the received method of
determining the essentials of a commodity, whilst seeking at
the same time to adhere as nearly to it as possible.
60. THE THEORY OF UTILITY PARTI
§ 2. Of the Essentials of the Conception " Commodity "
Things are means for the satisfaction of wants, or in other
words are commodities, when with reference to them there is
realised a complex of conditions of fact, which may be regarded
as a modality of the things themselves. In fact a thing has
modalities of place, time, quality and quantity, that is to say, it
may be situated in one place or in another, it may exist at one
moment or at another, have certain structural and functional
properties, or others, and it may exist, or be supposed to exist,
in a variable quantity. When a thing satisfies an existing
want in an individual who has a determinate want, at a given
moment, and of a given magnitude, it is considered that the
thing has determinate structural and functional properties.
It follows that, as a general rule, the essentials that consti-
tute a thing a commodity are : (a) the existence of a concrete
want, which implies the existence of an individual who feels it
in a certain measure and at a given moment ; (&) the existence
of a thing ; (c) the opinion that this thing has determinate
structural and functional properties ; (d) the presence or accessi-
bility or availability of the said thing in a determinate
quantity, in relation to which alone and exclusively the judg-
ment is formulated that the thing is a commodity. Let us
examine these requisites separately, adverting to some of the
controversies to which they have given rise.
(a) It is necessary, in the first place, that there should
exist a want with reference to which a thing may be a com-
modity. A want exists when we are conscious of it ; there
are no such things as unconscious wants, as we have already
observed, for every state of need is a state of suffering, and
this is the most direct manifestation of consciousness. It
matters not whether the want be reasonable or unreasonable,
commendable or ignoble. It is, as a rule, a matter of indiffer-
ence whatever its quality may happen to be, or whatever our
judgment concerning it, under any aspect, may be. What is
alone sufficient, but necessary, is its simple existence. With
every variation of our wants, the degree varies in which things
are commodities, as also the group of things that have the
property of being commodities. In fact, in the same measure
CHAP, iv THE CLASSIFICATION OF COMMODITIES 61
in which a thing satisfies a want, it is a commodity ; for a
want the non-satisfaction of which is very painful, will make
the thing that appeases it seem intensely pleasurable, and a
want the non-satisfaction of which is slightly painful, or
almost indifferent, will make the thing that extinguishes it
seem of little or almost no significance. Hence, the quanti-
tative variations of our wants are in a direct ratio to the
variations of the degrees in which the things are commodities.
It is obvious, a fortiori, that to the qualitative variations of
our wants correspond variations (in the same direction) in
the group of things that are commodities, and that therefore
to the law of the progressive extension of our wants corresponds
a law of the progressive extension of the group of things that are
deemed commodities.
(6) and (c) It is necessary, in the second place, that there
should exist a thing respecting which we entertain the OPINION
that by its means we can satisfy the want in question. It is
not necessary that the thing should actually possess the
properties attributed to it, or the qualities it is considered
to possess. Doubtless, in civilised times, the rule will be that
the thing that is deemed a commodity does possess the pro-
perties attributed to it, and that these properties have the
virtue of appeasing the respective want. We esteem quinine
e.g. to be a commodity in relation to the suffering produced
by malarial infection, and as a matter of fact it possesses the
property of preventing the recurrence of attacks of that species
of fever. But this drug would still be a commodity in an
economic sense, if the said property were purely imaginary,
for human judgments and actions are adjusted to so much of
objective reality as enters into our consciousness, and not to
what remains outside it. Probably a large proportion of the
medicines of to-day are commodities of a kind which a later
generation, if more enlightened than ourselves, will pronounce
to be imaginary. And, in the same way, many other classes
of cognitions, or of objects to which they relate, as also entire
groups of instruments, and various processes and institutions,
would by minds more enlightened than our own as to the laws
of nature and the actual properties of things, be deemed to be
imaginary commodities. But, at any given moment, there is no
distinction between imaginary and real commodities, for even
62 THE THEORY OF UTILITY PART i
the latter are commodities for us, only inasmuch as they too
are imaginary, i.e. inasmuch as we conceive of them as possess-
ing determinate properties.
A useless discussion has been carried on as to whether
things capable of being commodities must be material, or
whether they may also be immaterial. It is necessary to
reflect * that a pain may be alleviated, or a pleasure procured,
only through something acting QII our senses, or through its
not so acting upon them, i.e. by their remaining in a given
state; that, moreover, our senses, cannot be affected, or pre-
served intact, otherwise than by the subsistence of some
relation between them and material objects,2 that being im-
plied in the very conception of a material object ; that con-
sequently inasmuch as commodities are things that appease
wants, i.e. remove pains or procure pleasures, they cannot but
be of a material nature ; and finally, that inasmuch as our
notions are derived from our sensations, we are not conscious of
any other than material existences. If it were discovered in
what manner a thing supposed to be immaterial can bene-
ficially or prejudicially affect us, who are in communication
with the outer world and with ourselves, only by our senses,
then we could admit the existence of immaterial commodities.3
In the same way the question as to what the sphere of the
conception commodity is, was solved more than thirty years
ago by Francesco Ferrara. The moot point was, whether
besides those objects arbitrarily designated as material, or
things, the services which one individual can render to another
are also commodities.
In this discussion the content and sphere of the concep-
tion thing, or corporeal thing, or material commodity, were
necessarily undefined, as were also the content and sphere of
the conception service. The first terms meant such things as
e.g. food, clothing, lands, houses, etc., the last referred to the
1 Franc. Ferrara, Prefazioni al Say, allo Starch e al Dunoyer in the
Biblioteca delV economista. Tullio Martello, Appunti di E. P. Lezioni
professate nella Scuola Superiore di Commercio in Venezia, Treviso, D'Auris,
1882 ; §§ 33-38, pp. 113-123 ; § 53, pp. 189-195.
2 A material object is an object that affects our senses.
3 Among foreign treatises on the materiality or immateriality of com-
modities, the best is John B. Clark's The Philosophy of Wealth, Boston, 1887,
chaps, i. and ii.
CHAP, iv THE CLASSIFICATION OF COMMODITIES 63
services e.g. of the physician, the lawyer, the actor, etc. It
was debated whether labour must be embodied in any particular
form in order to be deemed productive of an economic com-
modity ; and a distinction was drawn between labour embodied
in matter pertaining to the world external to man, and labour
the effect of which is to modify man himself. Proceeding to
analyse the conception of services, it was asked whether they
do not include, for instance, the goodwill of a business (since
this resolves itself ultimately into the fact that a number of
persons are in the habit of performing one act rather than another,
i.e. purchasing from one merchant rather than from another) ;
an industrial patent (which also consists after all only of the
right to restrain others from performing a certain series of acts,
namely, manufacturing and selling a certain article, and to reserve
to oneself the exclusive privilege of doing so) ; and in general
every kind of action, or abstention from action, on the part
of others, which an individual regards as conducive to the
satisfaction of his wants. And just as among the so-called
material things were included both objects calculated to satisfy
a want directly, such as bread, a cloak, a house ; and objects
calculated only to supply a want indirectly, i.e. instrumental
with reference to the former, such as grain, wool, stones,
lime, or (even more remotely) lands, plants and animals that
produce textile materials, quarries, and tools or instruments of
every description ; so too amongst services were reckoned not
only such as minister directly to a want, e.g. the work of a
surgeon who sets a dislocated limb, but such also as satisfy
a want only indirectly, being instrumental with respect to the
former, e.g. a knowledge of surgery, musical talent, etc.
A clean sweep may now be made of all these discussions.1
Their net result may be summed up in a few propositions, of
which the first is this : Everything that affects our senses,
whether it l)e a part of the external world in which men live,
or a positive or negative act of one or more men with respect to
another man, may be a commodity, i.e. it may satisfy a want,
extinguish a painful sensation, or engender a pleasurable one.
1 Sax, Bb'hm-Bawerk, and some others still discuss this subject at length,
being apparently unacquainted with the greater part of what has been written
about it out of Germany. Vide Sax, Grundlcgung der theoretischen Staats-
wirthschaft, Wien, 1887, A. Hoelder, part iv. § 33, p. 199 ; § 35, p. 209 ; § 38,
p. 228.
64 THE THEORY OF UTILITY PART i
What is necessary is, that what we consider a commodity
should be brought to our knowledge, by means either of our
nerves of general sensibility, or of our specific nerves ; that
is : it must either affect our sense of touch, appearing hard or
soft, heavy or light, warm or cold ; or else our senses of taste,
smell, sight or hearing. Hence we must regard as being
equally commodities : bread, clothing, medical advice, the speech
or pleadings of counsel, the credit embodied in a bill of ex-
change or contract, the vocal performance of a prima donna,
the resort of customers to a place of business, the abstention
from competition on the part of manufacturers restrained by
the exclusive patent rights of another, the abstention from
bidding at an auction on the part of capitalists restrained
by some (possibly altruistic) interest, and the discoveries of
the scientific investigator. On the other hand, it must be
borne in mind that whatever does not affect our senses is not,
because it cannot be, a commodity ; and hence we must regard
as being equally not commodities : all forces of nature of which
we are still ignorant, all undiscovered substances or unknown
processes, the thoughts of men that are unexpressed in any
shape that can affect the senses of others, their unrevealed
mental acquirements, and their sentiments that are not trans-
lated into actions or into abstentions from determinate actions.1
It is immaterial whether the things (and things include
actions, for actions are always movements of things) satisfy
wants directly or indirectly. In the same way that a field
is a commodity because it is productive of wheat, which may
be transformed into flour, which in its turn supplies us with
bread ; so, too, the written, or spoken, or otherwise manifested
advice of the physician, which results in the administration
of a- medicament, and the instrument of a surgeon who is
called in to effect a beneficial modification of a pathological
phenomenon, are likewise commodities.
A second point that must be borne in mind is the follow-
ing : The effect of a commodity on a man is one thing ; the
commodity itself is another; and the ultimate causes of the
commodity are yet another. In fact, as regards the first point,
every commodity produces psychological effects : the bread that
is eaten produces ultimately a certain sensation ; and so do
1 Jennings, ubi supra, pp. 88, 89.
CHAP, iv THE CLASSIFICATION OF COMMODITIES 65
the clothes that are worn and the house that is occupied ; the
same applies to the physician's advice, the surgeon's operation,
the singer's voice, the acts of the customers at a place of
business, and the abstention of bidders from an auction. The
effect of every commodity is always ultimately a modification
of an individual's state of sensibility, under the influence of a
longer or shorter series of operative causes. On the other
hand, passing on to the second point, the commodity itself is
always the cause or instrument that produces the effect; and
this sometimes directly, sometimes consequently on its trans-
formation into some other instrument which has that effect,
and sometimes as a factor in the production of such an in-
strument. Finally, and this is the third point, a commodity
exists as the result of determinate causes, which in so far as
they are known, and therefore affect our senses, are instrumental
commodities in relation to those that are derived from them,
but which, in so far as they are unknown, or (which amounts
to the same thing) do not affect our senses, are not commodities
at all. Thus, for instance, we may ascend from the bread to
one of its concomitant causes, flour,1 from the flour to the wheat,
1 Among the many causes that contribute to the production of a direct
economic commodity, only some possess economic importance, and that in
accordance with laws that are still somewhat imperfectly known to us, and which
will be discussed in part ii. chap. iii. § 4, and in part iii. chap, i., in addition
to what is contained on this subject in this part, chap. iv. § 5. At present it
may suffice to indicate the nature of the problem, as expounded by Wieser, the
economist to whom we are indebted for what we know with most certainty
respecting it. If an economic commodity is due to the co-operation of several
factors, i.e. if it is the effect of the simultaneous, or successive, operative con-
currence of several causes, the question is not what part — still less which part —
is physically due to each of the concomitant causes. As J. S. Mill observes, it
is idle to attempt to decide which half of a pair of scissors has most to do in
the act of cutting ; or which of the factors five and six contributes most to the
production of thirty. — J. S. Mill, Principles of Political Economy, book i. chap,
i. § 3, p. 17. Just as a question may be raised (though quaere whether it can
be solved) as to the proportion in which each of several physical causes con-
tributes to produce an effect, so a like question may be raised as to the relation
between an effect and its causes, under a moral or a legal aspect. As Wieser
points out, a murderer is only one of the contributory causes of his victim's
death, if the lethal result be viewed with reference to its physical causation ;
but he alone is the subject of legal imputability, nor can any part of it extend
to the fact that the deceased was mortal, or that the knife was sharp. And
in the same way that, in the problem of physical imputation, no account is taken
of the principles that serve to determine moral or legal imputation, and vice
versa, so, too, economic imputation constitutes an entirely distinct problem, and
F
66 THE THEORY OF UTILITY PART i
from the wheat to the soil, and from this to its chemical
constituents ; and each of these factors of the ultimate product
will be an instrumental commodity in relation to the preceding
one ; but already in this series, — if we consider the forces of
nature that are in operation — and all the more so were we to
extend the series, we arrive at unknown causes with which,
for that very reason, we are unable to deal. In the same way,
from the medicament we may ascend to one of its contributory
causes, the recipe, and from this to the action of the physician
who wrote it down ; but the intellectual process which dictated
it eludes our senses, nor do we know what, if any, chemico-
physical action within his brain determined that process.
To sum up what has been said, we have the following
propositions of Professor Ferrara, consisting partly of defini-
tions and partly of theorems : (a) those things are material
which either directly or indirectly (i.e. by inference) affect our
senses ; (6) for man only material things have any existence ;
(c) any thing may be a commodity, provided it supplies a
want ; (d) the effect of a commodity is always psychologic ;
(e) the commodity and its effect are totally distinct phenomena ;
(/) the causes of commodities are themselves commodities, in
so far as they are material and, therefore, known to us ; whereas
if they are immaterial, they are also unknown to us.
This being premised, there is no reason why, for the sake
of convenience, we should not divide all things that are com-
modities into two classes, viz. into objects pertaining to the
external world, or things strictly so called, and services, or
positive human actions, and abstentions from actions which
would inconvenience any one, or, as Genovesi terms them, non-
actions. Tropes and inaccurate distinctions may be extremely
useful, provided they do not mislead us ; just as a defective
tool may be serviceable if its defects are known.
(d) The third requisite is the availability of a thing in a
determinate quantity. What, however, is meant here by the
" availability (disponililitti) of a thing," is a complex of con-
ditions which require to be exactly enumerated : —
requires that abstraction be made of those factors of the phenomenon which are
its causes under a physical, moral, or legal aspect, and that attention should
be directed exclusively to those factors which are its causes on hedonimctric
principles. — Wieser, Dcr naturliche Wcrth, pp. 70-76 and 85-88.
CHAP, iv THE CLASSIFICATION OF COMMODITIES 67
(1) In the first place, it is obvious that a thing is not,
strictly speaking, a commodity except at the moment it affects
our senses, either directly by procuring for us a pleasurable
sensation, or indirectly, by saving our senses from being
noxiously affected by any cause whatever. Briefly, we may
say that a thing is a commodity only at the moment when it
is consumed, and because it is consumed.1 Food, clothes,
means of enjoyment of every kind are not commodities for him
who only sees them in the shop windows, but has no money
to purchase them. Availability accordingly signifies, in the
first place, the presence, of a thing in the shape and in the
quantity that are requisite for the actual enjoyment thereof ly
him who esteems it a commodity, and who is a determinate
individual.
(2) If however, instead of regarding the matter from the
point of view of a determinate individual, we regard it from
the point of view of a group of individuals, we come to
consider as commodities also those things which affect in a
pleasurable manner the senses of any one of the individuals
who compose the group, even though such things may be
altogether indifferent to the other members, and we estimate the
things as the group might, if considered as a person. Avail-
ability means then the presence of the thing in such a manner
that at least a section of a group of persons actually enjoys it ;
whilst the quantity in which it is reputed to be present is
indeterminate, and the forms in which it appears are various.
(3) But amplifying still further the meaning of the term
availability, we proceed to observe that those things are com-
modities which, by reason of the present condition of the
technical arts, are accessible to any one who can and will take
the series of steps that are necessary to acquire them, and that
the property of being commodities is denied only to things
that are inaccessible to mankind in general.
Accordingly, those things are not available, or are in-
accessible, which cannot in any way pleasurably affect our senses,
owing to their being beyond the range of the latter. For
instance, fertile lands in regions we cannot penetrate, or mines
hidden away in the bowels of the earth, are not commodities
because they are inaccessible. Briefly, we may say that, in this
1 Confer part ii. chap. i. § 1.
68 THE THEORY OF UTILITY PART i
sense, the inaccessibility of a tiling is equivalent to its non-existence,
or to its availability in a quantity equal to zero, and conversely,
that its availability is equivalent to its presence in an in-
determinate quantity for the benefit of an indeterminate
number of consumers.
Having set forth these different meanings of the term
availability, which is used, now in one sense and now in another,
with reference to commodities,1 although only the first of such
meanings is not vague and hazy, we must be on our guard
against the supposition that the term availability implies any
of the essentials pertaining to it in its legal acceptation.2 The
availability required by the economist will at times be a legal
right to dispose of a thing, but as often it will not be so. In
order to elucidate the difference between the meaning of this
term in economics and in law, we shall proceed to show how
availability may exist for the economist in cases where it does
not exist for the jurist, and even in cases where it is not easy
to perceive the existence of any physical availability.
In civilised communities certain forms of the power of
disposing, or availing oneself, of things are recognised and pro-
tected by the law, such as ownership, possession, easements,
etc., and as a rule economic and legal availability will coexist ;
but a thing may be an economic commodity even where this
is not the case. Thus a res furtiva is a commodity in the
hands of the thief, whilst the right of ownership is not a
commodity for the person despoiled of his property.3 Economic
availability is any condition of fact that enables an individual
to enjoy a thing, either conformably, or at variance, with the
dictates of law and morality.
What circumstances of fact however constitute the kind
of availability that entitles a thing to rank as a commodity, it
is not always easy to determine. Thus, in the above-mentioned
instance of the goodwill of a shop, what is available is the
combination of circumstances that induces consumers of a
certain product to purchase it of one person rather than of
1 See chap. v. of this part, § 2 and following.
2 The distinction here adverted to between the economic and the legal
significance of the Italian " disponibilita," does not apply to "availability," by
which, for want of a more exact equivalent, I have rendered that term.— Tn.
3 Fabio Besta, Corso di ragioneria, part i. book i. chap. i. art. ii. pp.
87-91.
CHAP, iv THE CLASSIFICATION OF COMMODITIES 69
another. Future objects may be commodities, nor are they
unavailable. Take e.g. a future crop, or a bill at three
months' date. The future crop may fail and the bill be dis-
honoured ; but until this is known to be actually the case,
the crop and the bill are uncertain future commodities.
Neither the crop nor the amount due on the bill is available ;
but already now is available, — in the form of an expectation
based on knowledge of physical laws, in the case of the crop,
and in the form of a contract, in the case of the bill — an
object which satisfies our present desire to know, with a
determinate degree of probability, that certain future wants of
ours will be supplied. To apprehended pains there correspond
expected commodities, and as those pains are present, so they
are assuaged with objects which are likewise present, albeit
their effects may only be realised at a future date.
Returning now to the various meanings that the term
availability assumes in economics, according to circumstances,
it remains for us to explain how and why it implies the
presence of a thing in a determinate quantity.
We have seen that mere accessibility is only the negation
of inaccessibility, which in its turn is the presence of the
thing in a quantity equal to zero. Now what is required in
order that a thing may be a commodity, is its accessibility or
availability in one of the three significations aforementioned,
in a determinate quantity above zero. We shall proceed to
consider why this is the case, and how the quantity is
determined in which it must be present.
According to the quantity in which a thing is present, it
may come to be, not a commodity, but either a positive evil
(discommodity), or an indifferent object. The determination
of the quantity that renders a thing a commodity or a dis-
commodity, depends on the magnitude of the want to which it
relates. Thus, e.g., two tumblers of water may be a commodity
to a thirsty man ; a third or fourth tumbler may already be
fraught with inconvenience ; whilst a fifth or sixth tumbler
would be altogether intolerable. The want designated " thirst "
had a determinate magnitude which was reduced by the first
and second tumblers ; the third and fourth effaced all trace of
it ; so that the fifth and sixth were no longer commodities,
owing to the absence of the prime requisite : the existence of
70 THE THEORY OF UTILITY PART i
a want.1 A determinate quantity of rain may be beneficial ;
but supposing it to increase, a limit is reached beyond which
it not only ceases to correspond with the need of agricultural
irrigation, but becomes positively noxious, and has to be pro-
vided against. There is no object of which, making abstrac-
tion of any quantitative determination, it can be predicated
that it is a commodity ; for only in so far as this determina-
tion is not lacking, can it be said whether it does, or does not,
correspond to a want which is itself endowed with dimensions.
To speak of things as commodities, without referring to concrete
and definite quantities of the same, with respect to wants of
certain and limited magnitude, is precisely like speaking of the
equality of a triangle, abstraction being made of its dimensions,
with a parallelogram of definite magnitude.2
§ 3. Of the Degree of Utility and of the Total Utility of
Commodities; of the Initial Degree of Utility of one or
more Commodities, and of the Final Degree of Utility.
Commodities, for the very reason that they are commodities,
are termed useful. Utility is therefore the abstract term
denoting the pleasurable or hedonic effect produced by the
complex of conditions which constitutes a thing a commodity.
For the reasons above set forth, it cannot therefore be said
that anything is useful without implicitly postulating : (1) the
existence of a determinate want; (2) the existence of deter-
1 See ante, chap. iii. § 2.
2 With reference to this somewhat long and elaborate inquiry into the
characteristics of the conception "commodity," it may perhaps be advisable to
warn the reader against a mistake commonly made in seeking for definitions,
and which is generally due to a habit contracted in literary pursuits. In each
particular science, we are NEVER concerned to know what are the meanings
attached to a term, either in vulgar parlance, or in any other science than the one
under consideration, but only to expound and determine its contents in the latter
exclusively, irrespectively of any other signification attached to the same term
in any other connection. In literary studies, on the contrary, inquiry is often
and properly directed towards the ascertainment of the various acceptations of
a term, wherever it is met with. Let us therefore discard the baleful habit of
perplexing economic discussions, and particularly those relating to definitions,
with linguistic questions, and let us rather endeavour to ATTRIBUTE to every
term the acceptation which renders it most fertile and useful, regardless of
the associations it may possess, either for the vulgar, or for the votaries of
other sciences.
CHAP, iv THE CLASSIFICATION OF COMMODITIES
71
minate properties in the thing, or the existence of the belief
that it possesses determinate properties ; (3) the availability
of the thing in a determinate quantity. The same may be
said, mutatis mutandis, of the predicate of disutility. Whence
it follows that, supposing a want to have a certain magnitude
at a given moment, and the estimate as to the properties of a
commodity to remain the same, the utility of each mininum
increment of such thing will depend on the quantity that was
previously available, since this will have modified the original
DIAGRAM XIV.
magnitude of the want. We shall call the utility of any
increment of a commodity the degree of utility of that in-
crement, and we shall express it graphically by means of an
ordinate drawn to the segment of the abscissa that denotes
the magnitude of the increment in question, and proportioned
in length to the degree of utility we are concerned with, just
as we expressed the several degrees of intensity of satisfaction
due to successive increments of a means of satisfaction. See,
e.g., qn, corresponding with the quantity On, in diagram XIV.
In fact, what we have before called intensity of satisfaction,
is nothing but what we now call degree of utility}'
1 Pareto proposes that the term ophelimity (from a>0A.i£ios) should be used
instead of utility, and I agree with him. Many ambiguities would thus be
avoided. In ordinary language, a thing is useful, if it is profitable to an
individual, conducive to his wellbeing. Thus, medicine is useful in the case
of a sick child ; but it is not ophelimous, i.e. it is not necessarily useful in the
economic sense: so much so that the child will probably reject it. Alcohol is
ophelimous for the drunkard, though by no means useful to him in the ordinary
72 THE THEORY OF UTILITY PART i
With respect to the degree of utility of the first portion of
any commodity, some doubt may arise as to what its magnitude
is, since there is no prior quantity available by which it may
be determined ; but it is obvious that it is equal to the degree
of pleasure occasioned to us by the partial extinction of the
want, in the measure in which such extinction is due to the
quantity of commodity constituting the first portion. This
first ordinate will be called the initial degree, of utility.
If we suppose a first and infinitely small portion, the
satisfaction we shall derive from it will be imperceptible, and
will be expressed accordingly by a very short ordinate. We
may therefore at once assume that every curve representing
the degrees of utility of any commodity commences with zero,
and rises rapidly to the culminating point, after which it
declines more or less slowly, according to the nature of the
commodity concerned. In diagram XIV. we have reproduced
the exact form of the curve expressing the degrees of utility
of any commodity, and have indicated increasing initial
ordinates Op, intended to denote growing degrees of satis-
faction until the quantity of commodity in question becomes
an appreciable increment, Om. In future however, as we have
indeed done in the preceding pages, we shall limit ourselves
to considering and representing the part p~K. of the hedonic
curve, and pm will therefore always be the ordinate denoting
the initial degree of satisfaction.
In order to characterise with precision and brevity the
nature of this curve, as of every other, a system of notation used
by Professor Marshall will be found to be extremely convenient.
Given a. system of co-ordinates OX and OY (diagram XV.), we
shall describe the direction of a curve as positive, if the describ-
ing point moves away from OX at the same time that it moves
away from OY, i.e. if it moves as if subject to two forces, one
drawing it in the direction Am and the other in the direction
An, the forces being either equal or unequal. We shall, on
the other hand, describe the direction of a curve as negative,
if the describing point approaches OY, as it moves away from
sense, etc. See Pareto's Cours d' Economic politique, § 4. Useful is "conform-
able to tribal hedonism " ; ophelinwus is "conformable to individual hedonism" ;
and this is what is nearly always intended in economics. If I were rewriting
this Manual, I should adopt the term.
CHAP, iv THE CLASSIFICATION OF COMMODITIES
73
OX, i.e. if it moves as if subject to two forces, one drawing it
in the direction ATI, and the other in the direction Ao. We
shall also describe as negative the curve whose describing
point, whilst receding from OY, approaches OX, i.e. the motion
of whose describing point is subject to two forces disposed as
Am and Ap. Finally, we shall describe as positive the curve
4-
P
DIAGRAM XV.
which approaches simultaneously OY and OX, i.e. which is
due to two forces acting in the directions Ao and Ap.
These terms being settled, it is clear that the characteristic
of the curve of final degrees of utility is that it must be, at
least ultimately, and as a rule entirely, negative and subject
to forces following the directions Am and Ap ; that, however,
the initial motion of the same for a brief space of time, or for
very small quantities of commodity, may be positive, i.e. the
effect of forces acting in the directions Am and An, the latter
preponderating over the former.
We shall say further that the total positive utility of a
commodity is equal to the sum of pleasure due to relief from
the corresponding want, and we shall refer to such a quantity
of a thing as will suffice to extinguish that want, or to such
lesser quantity as is in question. Graphically, the total utility
will be expressed, in the first case, by an area limited by an
abscissa denoting the quantity of commodity in question ; by
the ordinate denoting the initial degree of utility, and by the
curve constituted by the extremities of successive ordinates
until they coincide with the abscissa; such an area, for
74 THE THEORY OF UTILITY PART i
instance, as QpqX. in diagram XIV. In the second case the
area will be limited by a final ordinate drawn to the point
of the abscissa corresponding with the last increment of the
thing in question, as e.g. the area Opqn. The total utility
may, as Messedaglia proposes, be very appropriately termed,
integral utility}
Negative utility, or disutility, will be expressed by the area
exceeding the last, formed by negative ordinates ; and it will
express the hedonic effect of ulterior quantities, i.e. their
neutral or noxious properties, as regards the homo ceconomicus.
If we suppose two or more commodities to be available in a
quantity sufficient to extinguish the respective wants to which
they refer, and if we consider proportional increments of each
commodity, e.g. one -tenth of each of two commodities, the
degrees of initial utility will be to each other as the import-
ance we attach to the satisfaction in that measure of each of
those two wants. We have already seen in chap. ii. § 6,
diagrams VL-X. pp. 34-37, with reference to Gossen's second
hedonic theorem, a graphic expression of ordinates of various
degrees of initial utility. Let us treat here as quantity of
available commodity what is there treated as quantity of
available time.
Lastly, we have to note the final degree of utility. What-
ever may be the available mass of commodity, the last and
smallest increment thereof has a hedonic effect which will be
positive or negative, that is either a pleasure or a pain. If
the available quantity of a commodity is exactly sufficient
completely to extinguish a want, it will be almost a matter of
indifference whether we obtain the last and smallest portion,
or not. Graphically therefore the ordinate that expresses the
degree of satisfaction it occasions us will indeed still be
positive, but almost zero, as e.g. that drawn to X in the
diagrams I.-IV. (pp. 29, 30, 31, 33). Any further increment,
however small, will occasion a negative final degree of utility,
and will be expressed by a negative ordinate, as e.g. here mm^ ;
and if the available quantity of the commodity in question
falls far short of satisfying the want it corresponds to, as e.g. in
diagram XIV. p. 71, the quantity On, the final degree of utility
1 A. Messedaglia, La inoneta ed il sistema monetario in generate. From the
Archivio di statistica, Loescher, Rome, 1882, chap. ii. p. 28.
CHAP, iv THE CLASSIFICATION OF COMMODITIES. 75
will be the positive ordinate that denotes the intensity of the
satisfaction occasioned by the last portion still available ; i.e.
it is equivalent to the pain we should experience if we were
deprived of it, and it will be expressed graphically by nq.
It may be well to observe that the final degree of utility
of the last available increment of any commodity may be
attributed to any one portion of the mass, considering it as
the last. In other words : the order in which the successive
increments of a commodity are disposed is perfectly arbitrary.
Assuming, for instance, that a commodity is divided into
three portions, designated respectively as a, /3, 7, these can be
interchanged in six different ways. Graphically this must be
n
DIAGRAM XVI.
expressed as follows. Let O/, Im, mn, in diagram XVI. be three
perfectly equal increments of the same commodity; let the
degree of utility of a first increment (i.e. the initial utility)
be measured by the ordinate Oa, that of any second increment
by 0&, and that of a third increment (i.e. in this case the final
degree of utility) by Oc. Now the final degree of utility Oc
may be attributed to any one of the three increments, O/, Im,
mn, supposing it to have been consumed last; which gives
rise to the parallelogram formed by On x Oc if we want to
express the total utility of the three increments, and suppose
each increment to be the last. We may next imagine that
any one of two increments out of three is consumed in
penultimate order, i.e. either 01 and Im when mn is third, or
01 and mn when Im is third, or Im and mn when 01 is third.
76
THE THEORY OF UTILITY
PART I
Let us suppose that mn is last ; then the portions 01 and
Im will both have a degree of utility Ob, and we shall have
the figure Om x 06 superposed on the former one, expressing
the total utility of these two increments both supposed to be
second. But either of the two portions, 01 and Im, may be
consumed first, and thus be characterised by the initial degree
of utility Oct. Let 01 be the one selected : its degree of utility
will then be designated by the area 01 x Oct.
If we imagine as infinitely small the increments into
which a homogeneous mass of commodities On is divided, we
in
DIAGRAM XVII.
shall have diagram XVII. We may thus formulate the principle,
that of a homogeneous mass of commodities, On, each part
may be the last increment, and may have the final degree of
utility rn ; and we shall find it convenient to designate by a
special term, e.g. residual utility,1 the utility we obtain by
deducting from the total utility, Oa rn, that formed by
attributing to each element of the mass a utility equal to the
final degree rn, i.e. by deducting from Oa rn the area Oc rn,
which leaves us the residual area car.
There is only one commodity which presents no residual
utility, because its total utility is equal to its mass multiplied
by its final degree of utility, which is constant. This com-
modity is money, which thus forms an apparent exception to
Gossen's or Jevons's law of the decrease of final degrees of
1 Consumer's rent in Professor A. Marshall, The Pure Theory of Domestic
Values, chap. ii. p. 28. Vide part ii. chap. ii. § 1, and note.
CHAP, iv THE CLASSIFICATION OF COMMODITIES
77
utility. According to this law the degrees of utility of suc-
cessive increments of any commodity decrease, and the total
utility of increasing quantities of any commodity varies,
according to a lower rate of progression than the increase in
quantity. Now, in the case of money, we find that the
degrees of utility of all the increments are equal, and that the
total utility increases in the same ratio as the quantity.1
Graphically, the curve of the degrees of utility becomes a
straight line cr, parallel to the abscissa Ox, and the total
C
DIAGRAM XVIII.
utility Oc rn is always denoted by rectangles (see diagram
XVIII.). That this constitutes an apparent exception to
Gossen's law is easily perceived if we reflect, that if a thing
is exclusively destined to be used as money, or is considered
exclusively as discharging this function, there is no painful or
pleasurable sensation with reference to which it can be a
means of gratification, and in respect of which there can be
degrees of satiety determining degrees of utility. Strictly
speaking, money is not a commodity, in the acceptation in
which we have hitherto used the term, and is not therefore
1 A. Loria, La teoria del valore negli economisti italiana, 1882 ; Arckimo
giuridico, p. 35, § 2 ; H. Sidgwick, The Principles of Political Economy, London,
1883, Macmillan, bk. i. chap. iii. pp. 77, 85 ; bk. ii. chap. v. p. 267 ; Launhardt,
Abschn. I. § 13, p. 54. Money has, for its owner, a marginal utility. It is an
instrumental commodity, susceptible of being transformed into direct com-
modities by way of exchange. Hence it possesses the marginal utility which
belongs to the last increments of direct commodities obtainable by its means.
This marginal utility is reflex, like that of all instrumental commodities.
78 THE THEORY OF UTILITY PART i
subject to the law that applies to all commodities. Whether
there be more or less of it, is altogether immaterial as regards
the satisfaction of every possible human want ; and the
monetary function of money is discharged equally well
whether its mass be doubled or reduced to one-half. As we
shall see farther on (part iii. chap, ii.), money possesses,
strictly speaking, no utility, but only value, and for this
reason its utility can only be expressed by the product of its
mass multiplied by its final degree of utility, as seen in
diagram XVIII.1
1 The theory of the final degree of utility, which is now recognised as the
pivot of every economic and financial doctrine, only excited the general atten-
tion of economists after the publication of Professor Je vons's work, The Theory of
Political Economy, in 1871, and the publication of a paper read by L. "Walras
at the Academy of Moral and Political Sciences in Paris, in 1873. This is
strange, as the theory was at that time by no means new. Jevons had already
expounded it in 1862, at the Congress of the British Association, and again in
1866. Professor Marshall taught the theory of final degrees of utility and that
of residual utility, in the University of Cambridge, as far back as 1869. The
father of L. Walras, in 1831 and in 1849, in two different writings (Le la nature
de la richesse et de I'origine de la valeur and Theorie de la richesse socialc, etc. )
had explained the essential features of the question, and in 1854 Gossen had
published his Laws of Human Commerce, in which the doctrine of the final
degree of utility is set forth so perfectly that until now very little has been
added to, or modified in, his exposition. Moreover in 1844 and in 1849
Dupuit had contributed to the Annales desponts et chaussees two papers entitled :
De la mesure de I'utiliU des travaux publics, and De ^influence des plages sur
Vutilite des voies de communication, which had attracted considerable attention
among engineers, and which set forth with great clearness the theory of final
degrees of utility, as also the conception of residual utility. In 1847, in the
same review, M. Bordas, and in 1850 M. Minard, discussed the subject, which
interested even the French Senate. M. Bordas indeed elicited the second
work of M. Dupuit by attacking the first. In England, a year after Gossen,
Jennings expounded the law of the decrease of protracted enjoyments, pointing
out its economic value. Finally, we must observe that amongst mathematicians
the theory of the final degree of utility was well known in connection with the
problems dealing with probabilities. It is found in D. Bernouilli, Specimen
theories novce de mensura sortis, 1738 ; in Buffon, Essai d'arithmdtique morale,
in the thirteenth volume of his complete works translated by Boschi, Naples,
1877, p. 347 ; in Laplace, Theorie analytique des probability, 1812, and Essai
philosophique sur la thtorie des probability's, 1840, and in Quetelet, Lettres sur
la theorie des probability, 1846. In the economists of last century, such as
Galiani, Genovesi, Condillac, Verri, and probably in several others as well
(vide A. Loria, La teoria del valore negli^cconomisti italiani, Bologna, Fava,
1882), the idea of decreasing degrees of utility is already clearly conceived ; but
it is not developed by them as it has been by more recent writers. Professor
Walras has reminded us that this theory is to be found even in Bourlamaqui,
1694-1748. Ricardo, and Anderson before him, discovered and utilised a
CHAP, iv THE CLASSIFICATION OF COMMODITIES 79
S 4. Of Positive and Negative Utility, and the Division of
Tilings into Positive and Negative Commodities
When a thing satisfies a want, it is termed a commodity,
and is said to possess utility. This utility is positive, that is,
it consists of a quantity of pleasure, or of absence of pain due
to possession of the thing.
When a thing does not satisfy a want, or creates in us
the desire to rid ourselves of it, it is said to be useless, and
this quality is considered as a negative utility, inasmuch as it
consists of a quantity of pleasure which is suppressed, or of
pain which is occasioned, through the instrumentality of the
thing, or of the conditions in which the thing is placed with
respect to us.
Now, we have already seen that if we suppose a want —
which must necessarily be of some given magnitude ; — and if
we suppose the physico-chemical properties of a thing and
our knowledge or opinion of such properties to be constant,
special instance of the general law of the decrease of final degrees of utility.
For fuller details the reader may consult the Storia critica della teoria del
valore in Italia, by Graziani, 1889, Hoepli, Milan, and R. Zuckerkandl's Zur
Theorie des Preises, Leipzig, Humblot, 1889, both of which works are not free
from partiality in the discussion of recent economists, but possess at the same
time (particularly the first-named) considerable merit.
Among the best recent books on this subject we may name Wieser's two
works : Ueber den Ur sprung und die Hauptgesetze des wirthscliaftlichen
Werthes, 1884, and Der naturliche Werth, 1889, Holder, Vienna ; also Auspitz and
Lieben's Untersuchungen iiber die Theorie des Preises, 1889, Dunker, Leipzig.
Worthy of mention is also C. B. Antonelli's Sulla teoria matematica della ec.
pol., 1886, Folehetto, Pisa. But Gossen's and Jevons's works remain the
standard authorities on the subject, and deserve the closest study. Besides the
paper above referred to, Professor Walras has published a treatise on pure
economics worthy to rank beside that of Professor Jevons, and superior to it in
some respects. I regret my inability to quote this treatise as often as it would
be appropriate to do so, owing to the fact that it often presupposes on the
reader's part a greater proficiency in mathematics than I can claim. At
present this writer is bringing out a new and considerably enlarged edition of
his fittments & economic, pure. He has also written Theorie de la monnaie,
Lausanne, 1886,Corbaz, based on the same principle. I have expressed elsewhere
my opinion on Monger's and Bbhm-Bawerk's works, and have confirmed it in
another note.
Now we possess two works of capital importance, the study of which is
indispensable to whoever would perfect himself in economics, viz. Prof. A.
Marshall's Principles of Economics, and Signer V. Pareto's Cours d'economie
politique, 2 vols. 1896, Lausanne, F. Rouge.
80 THE THEORY OF UTILITY PART i
then the utility of this thing is a function of its quantity,
and, at first positive, ends by becoming negative. Every
commodity may thus cease to be a commodity, and may
become a thing of negative utility, or to put it more briefly
than accurately, a negative commodity. But if, instead of
the above-mentioned hypotheses, we suppose the available
quantity of a thing to be a fixed quantity, whilst the magni-
tude or nature of our want is instead variable ; or, supposing
this also to be given, that the physico-chemical properties of
the thing are variable, then we see at once that we can consider
positive and negative utility as a function of one or other
of these terms. In fact, as regards the variations in the
magnitude of the want, it is self-evident that they are equiva-
lent in their effects to the variations in the quantity of the
thing, since the latter variations only give rise to various
degrees of utility, inasmuch as the original dimension of the
want is modified by each successive increment of commodity
rendered available or appropriated. Moreover, changes in the
nature of a want determine an instant transition from utility
to disutility (and vice versd) in the quality of things: they
are equivalent to variations in the employment of things, and
transform positive into negative utility, and vice versd, as the
case may be. There remain to be considered the variations of
the physico-chemical properties and of our opinions of them.
Now, it is clear that, speaking generally, in all things, together
with the properties that qualify them to satisfy a want, there
are an infinity of other properties that diminish this positive
useful effect, or annul it altogether, unless they are removed.
These latter properties are thus characterised by negative
utility, and among them we may often reckon, e.g., the perish-
ableness of commodities, their indivisibility, weight, volume,
inseparableness from other substances, etc. It is also clear
that, given the invariability of a determinate want and the
invariability of a determinate quantity of a thing, the latter
may pass from the condition of utility to that of disutility, or
vice versd, solely in consequence of variations in its tempera-
ture, composition, velocity, or of any other physico-chemical
property.
The reason therefore for dwelling on the utility of things,
only as a function of their quantity, and not also as a function
CHAP, iv THE CLASSIFICATION OF COMMODITIES 81
of our wants, or of their physico-chemical properties, consists
exclusively in the greater fecundity of this conception.
The negative commodity par excellence is cost ; but this
will be discussed in a separate section, in view of its para-
mount importance.
§ 5. Of Direct, Complementary, and Instrumental Utility accord-
ing to Gossen, and of a corresponding Division of Commo-
dities into Direct, Complementary, and Instrumental.
The Law of Definite Proportions
Certain commodities (whether supplied by nature, or
procured by means of labour is immaterial) are fitted to
supply a want directly they are placed in contact with our
senses ; and of these we say that they possess direct or
immediate utility. Such commodities are, e.g., food prepared
for consumption, a suit of clothes, a chair, a furnished house,
a ripe fruit, drinking water, etc. The only commodities man
ultimately wants or needs are such as are possessed of direct
or immediate utility ; for what he really desires is the satis-
faction of his wants, not the possession of things for their
own sakes. Commodities belonging to this class have various
names ; sometimes they are called direct or immediate com-
modities, sometimes commodities of the first degree, sometimes
consumalle commodities or consumer's wealth.1 The total
utility of any such commodity is precisely equal to the sum
of the pleasure it affords us.
There are moreover things (also supplied partly by nature,
partly by human labour) which do not by themselves alone
satisfy any want, but do so when combined with other things.
A stove, for instance, requires fuel and fire, in order to
give out heat ; a coach, in order to serve as a means of con-
veyance, requires a motor force and a driver ; and a certain
portion of hydrogen must be combined with a certain portion
of oxygen, that we may have water. These things considered
singly, and apart from any direct or immediate utility they
may possess, are negative utilities ; but if combined with others,
so as to produce, jointly with them, the satisfaction of some
1 On commodities fitted for direct use, see J. S. Mill's Principles of Political
Economy, 1880, p. 19.
82 THE THEORY OF UTILITY PART I
want, they are termed complementary commodities, and possess
a kind of utility which, in contradistinction from the former,
is called complementary utility. Sometimes they are also
called correlative commodities, and we speak of correlative
utilities, or correlation of utilities, or auxiliary wealth.1
The total utility that complementary commodities are
capable of producing, when combined with others in definite
proportions, so as to satisfy an immediate want, is equal to
the total utility of a direct commodity that would satisfy this
same want. It is not easy to determine the proportions in
which this total utility is distributed among the several
complementary commodities that contribute to the satisfaction
of a want, because it is only in so far as they are combined in
definite proportions that they possess any utility. If however
a person possesses all the complementary commodities, save
one, required for the satisfaction of a want, and in the pro-
portions required by the conditions of the technical art
applicable to the case; or if he possesses also the final com-
plementary commodity he requires, but in a proportion in-
adequate to his purpose, then the total utility of this last
complementary commodity, or of the quantity thereof that
1 Sidgwick, The Principles of Political Economy, book ii. chap. i. p. 164.
Strictly speaking, every direct commodity may be considered as a combination
of complementary commodities, and this under a twofold aspect. First, from
a physico-chemical point of view it is a combination of many elements, which
may be regarded as the joint factors of its production. Secondly, the useful-
ness of a direct commodity to the consumer is a function, not only of its own
quantity, but also of that of all the other commodities he consumes together
with it, of those he has consumed previously, and even of a portion, at least,
of those he expects to consume later. Indeed the utility of a commodity
depends further on the order in which other commodities have been consumed
previously. Thus, for instance, the gratification a loaf of bread may afford
depends not only on its size and on the appetite of the eater, but also on the
other viands, if any, he partakes of with it, on the fact of his having quenched
his thirst or possessing the means of doing so, of his feeling cold or warm,
tired or fresh, sad or gay. The order in which dishes are served heightens, or
detracts from, the hedonic effect of a dinner. Each of these conditions then
may be regarded as a factor of production, and all of them together as forming
a combination of factors of production, or of complementary elements. Con-
sidered from this point of view, the theory of complementary commodities
assumes a very general aspect. Every problem of production or consumption
will be transformed into a problem of complementary commodities or factors of
production, and the most general theorem concerning complementary com-
modities will be the most general theorem concerning production and consump-
tion.
CHAP, iv THE CLASSIFICATION OF COMMODITIES 83
is lacking, may attain to the limit of the total utility of the
direct commodity that ivoidd satisfy the want to which the
complex of complementary commodities in question relates.1
The law of definite proportions is one of the most generally
applicable of natural laws, and economic science only recognises
a particular aspect of it. It is well known that bodies combine
chemically only in definite proportions, and that any quantity
of an element, in excess of that required for combination with
other elements present in definite quantities, remains free.
If the quantity of one element is deficient with respect to that
of other elements present, the combination only takes place to
the extent the former element admits of. Just in the same
way, any quantity of a commodity, in excess of the proportion
in which nature, or any technical art, can combine it with
a determinate quantity of other complementary commodities
present, is useless or noxious as regards the economic result ;
and if all the complementary commodities requisite for the pro-
duction of a direct commodity are present in various quantities,
then the quantity of the complementary commodity that is
present in a lesser quantity than any other, is that which
determines the quantity that can be produced of the direct
commodity in question ; the superfluous quantities of the other
complementary commodities being, for this purpose, destitute of
utility. This law of definite proportions is of capital import-
ance in explaining a very frequent form of economic crisis,
consisting in the disproportionate production of complementary
commodities. It must, however, not be understood as if there
were only one definite proportion in which complementary
commodities can be combined. There are generally a great
many, but only one gives a maximum hedonic result. This
maximum combination is the one towards which every
economic effort tends.
1 The problem of the distribution of the utility produced by a combination
of complementary commodities among the latter as the causes of such utility,
or in other words, the problem of the distribution of the utility produced by the
concurrence of complementary commodities among the possessors (supposed to be
distinct) of each such commodity, will be discussed in detail in chap. i. of part iii.
instead of here, where it might be appropriately considered. This is owing to
purely didactic reasons, so that any one already proficient in economic questions
may complete this theme now, by passing on to part iii. chap. i.
The nature of the problem has been referred to in part i. chap. iv. § 2, note,
and will be touched on again in part ii. chap. iii. § 3.
84 THE THEORY OF UTILITY PART i
Finally, there is a third class of things and utilities, which
in so far as they pertain to this class, never afford any direct
satisfaction, whether considered singly or in conjunction with
others, but which serve as instruments for the obtainment of
immediate and of. complementary commodities. Thus e.g.
whilst bread is an immediate commodity, the flour, the wheat,
the soil, are instrumental commodities, each more remote in
degree with respect to the bread. To this category belong
all raw materials which must undergo some transforming
process in order to become consumable commodities, all
machines or instruments required for the production of
immediate commodities, and hence also most services, and
especially the workman's labour. These instrumental com-
modities rank in degree according to their remoteness from
the immediate commodities to whose production they are sub-
servient, i.e. according as they are instruments for the pro-
duction of an immediate commodity, or instruments for the
production of an instrument required for the production of an
immediate commodity, and so on. Instrumental commodities
are also known by various names ; sometimes they are called
commodities of a superior degree, sometimes capital, sometimes
productive commodities, or producers wealth. It must above
all be observed, that every direct commodity may become an
instrumental commodity , from the mere fact that its possessor
decides to use it as an article of exchange. In that case, its
utility is measured by the utility of the thing procured
through its instrumentality, by way of exchange.
It is clear that a commodity may be simultaneously, lut
with respect to diverse wants or uses, an immediate, a com-
plementary, and an instrumental commodity. A piece of
land, e.g., may be an immediate commodity if suitable as a
place of recreation, an instrumental commodity, if cultivated,
and a complementary commodity for a tenant possessed of
farming stock, live stock, and every other complementary com-
modity necessary to the carrying on of agriculture. Nearly all
instrumental commodities are at the same time supplementary
to other instrumental commodities.1
The total utility of instrumental commodities is determined,
1 A special way in which instrumental commodities may become direct com-
modities is noticed by Mr. H. Spencer, Data of Ethics, p. 158.
CHAP, iv THE CLASSIFICATION OF COMMODITIES 85
like that of complementary commodities, by the satisfaction
afforded by the extinction of the want to which they corre-
spond, i.e. its maximum limit is the total utility of the direct
commodity to the production of which they contribute. If an
instrumental commodity cannot be transformed forthwith into
a direct commodity, but requires the concurrence of other
instrumental commodities, as is generally the case, we cannot
discuss its utility, as such, singly, because it is subject to the
law of complementary commodities. Here, too, recurs the
phenomenon, that the single element that is lacking may come
to possess the total utility due to the complex of instrumental
commodities required for the production of a direct commodity.
Instrumental commodities are also subject to the law of
definite proportions}
1 The distinction between immediate or direct, and instrumental commodities,
and the theorem derived from it concerning the total utility of the latter, owe
their origin to Giammaria Ortes, in whose system they constitute a cardinal
point. It has thus taken this theory nearly a hundred years to commend itself
to the general acceptance of economists, viz. from 1774, the date of publication
of the Economia nazionale, until 1871, when Menger rendered it current. Ortes
explains : ' ' that though lands are the groundwork of commodities, they cannot
for that reason themselves rank as commodities ; so that whatever extent of land
be given, the sustenance accruing therefrom to the nation is attributable, not to
the land, but to the commodities derived therefrom, unless we were to live on
mud like the frogs, or underground like the moles." Nor can land be considered
as equivalent to commodities : "so that again whatever extent of land be given,
and whatever amount of produce be derived from it, a nation does not on this
account find itself provided with any commodities for its sustenance, unless it be
immaterial whether we eat chestnuts or acorns, cabbage or chicory, or whether we
clothe ourselves with vine leaves or briers." And hence "the whole relation of
land to commodities, and the necessity of the former with respect to the latter, is
limited to the possibility of deriving certain commodities from the former ex-
clusively." See Ortes, Dell' economia nazionale, book iv. c. 2, pp. 13-16 : c. 3,
pp. 18-20 ; c. 18, pp. 103 et seq. vol. xxii. Collezione Custodi. The theory of
immediate, complementary, and instrumental commodities was explained in the
most masterly fashion by Gossen, op. cit. pp. 24-27 ; and Menger, to whom the
theory is often attributed, added nothing to it.
The law of definite proportions is much more general than Gossen suspected ;
but Menger also failed to perceive the fact. In the most general form it signifies
that every quality of things exists only in a given measure, either known or un-
known, and that consequently every relation among things, of whatever kind,
being a relation of quality, may be expressed mathematically. The theory of
utility and of instrumental commodities has on the other hand made a notable
advance — notable not in respect of its magnitude, but in respect of the difficulty
of making it, — through v. Wieser. See ante, chap. iv. § 2, note ; part ii. chap,
iii. § 4 ; and part iii. chap. i.
THE THEORY OF UTILITY PART i
§ 6. Of Actual and Prospective Utility, and of an Analogous
Classification of Things as Actual and Prospective Com-
modities.
Our wants are partly actual and partly prospective, i.e. we
experience at the same moment a twofold series of wants, some
due to the presence of a real cause of pain, and others due to the
apprehension of pains which we consider as probable or certain
in the future. In the same way, we are presently gratified
as we become possessed of commodities, and we are also gratified
by the anticipation that certain commodities will, at a deter-
minate point of time, become ours. The conception of a future
commodity supposes that we anticipate, not only the future
availability of a thing, but also the existence, at that point of
time, of the corresponding want. Now, there are many wants
of which we can foresee the continued duration, or the constantly
renewed recurrence, at all periods of our life, — notwithstanding
the law of the variableness of our wants (chap. ii. § 2 and chap,
iii. 8 4, ante), — and there are also many wants of which we can
foresee the future existence, in consequence of the law of the
variableness of our wants. The tribal egoist moreover foresees
the wants of others, i.e. of those to whom his egoistic cares
extend.
Calculations as to prospective wants and commodities are
always surrounded with great difficulties ; it is necessary to fore-
see when the prospective wants will come into being, lest the
provision made for their satisfaction should be premature or
tardy ; and we must also foresee their magnitude, lest such
provision should be excessive or deficient. Evidently the
hedonist, i.e. the homo ceconomicus, must tend to maximise
his enjoyments for the entire probable duration of his life, and
not merely for the present instant, or for that immediately
subsequent to it. The calculation is therefore further compli-
cated by the estimate he has to form of his own probable
sensibility to pleasure and pain, from time to time, during the
probable course of his life ; and he must distribute the painful
efforts requisite to the production of commodities, and the
enjoyment he can derive from the latter, in such a way as to
achieve, on the whole, the maximum of pleasures and the
CHAP, iv THE CLASSIFICATION OF COMMODITIES 87
minimum of pains. Every one must see how many errors of
hedonimetric calculation must be made, even by the acutest
minds, and how different accordingly the theoretic action of
the homo ceconomicus must prove to be from the real course of
human conduct. But nature treats men just as if they were
omniscient and perfect hedonists, eliminating in the struggle
for existence those who blunder, or debilitating them, if they
do not succumb at the first stroke, so that they remain more
liable to be eliminated by the second or third blow entailed
by subsequent mistakes.
The present valuation of prospective commodities calls for
some explanation. Prospective commodities are of two kinds, and
it will be advisable in the first instance to consider the simpler
kind, viz. those which can only once be productive of a service,
or in other words, that only once are useful, and satisfy a want.
Now, supposing two commodities of simple productiveness,
the one actual, the other prospective, but equal in every other
respect, the question arises whether their total present utility
will be esteemed as equal or unequal. A glass of water, e.g., is
an actual commodity of simple productiveness for any one who
is thirsty, a loaf of bread for any one who is hungry, a sum
of money for any one who requires to spend it ; whilst instances
of a prospective commodity of simple productiveness are a
growing crop, or a credit maturing at a certain date, such as a
bill of exchange. The hypothesis of two commodities pertaining,
the one to the category of actual, the other to the category of
prospective commodities, and being equal in every respect,
except as regards the time at which they are available, implies
the concurrence of numerous and complex conditions, and more
especially : that their utility should be equal in duration and
intensity, i.e. that their metrical quantity should be the same ;
that they should correspond to the same kind of wants ; that
these wants should be of even degree in the scale of wants,
and equally intense at the two different times when the com-
modities in question reach maturity, and that they should be
equally certain; and the question whether the total utility
of the two commodities, at the present moment, is the same or
different, is equivalent to the question whether they correspond,
at present, to equally intense wants, and occupy the same rank
in the scale of wants.
88 THE THEORY OF UTILITY PART i
Now, we have already remarked above (chap. ii. § 4), that if a
hedonist were quite certain that he would still be alive when the
prospective commodity (or discommodity) matured ; if he con-
sidered the prospective event as undoubted ; and if he were
further convinced that he would then possess the same sensibility
to pleasures and pains in all respects as he is now endowed with,
then he must estimate such prospective commodity (or discom-
modity) precisely in the same manner, attributing to it exactly
the same quantity of utility (or disutility) as if it were present.
There is only one case in which his estimate may possibly
differ from the above, consistently with the hedonic postulate,
namely, if it be a condition precedent of enjoying the prospective
commodity at all, or of enjoying it with the same intensity,
that the present commodity should have been enjoyed first.
Thus, for instance, it is a necessary condition of our enjoying
food at a future time, that we should continue alive until then,
and consequently that we should partake of food in the mean-
time ; and many present acts of consumption may be at the
same time an indispensable condition of our enjoying prospec-
tive pleasures with the same degree of sensibility as we at
present possess. In this special case of the correlation of
present and prospective enjoyments, whose respective total
utilities are compared, the latter will not be estimated as
equal ; but this very correlation constitutes a contradiction
of the terms in which the problem was stated, viz. : the
equality in every respect, except that of maturity, of the two
commodities in question. "We must therefore make abstraction
of it ; in which case the proposition of the absolute equality of
present and prospective commodities in the estimation of a
perfect hedonist, remains intact.
A fortiori we must argue that, on this hypothesis, two
commodities, prospective in various degrees, are always equal
inter se, if they are so in every respect save that of maturity.
On the other hand, it is a fact which calls for explanation,
that prospective commodities, if equal in duration and intensity
to present ones, are always estimated less than the latter. It
is evident that we may admit, that men constantly err in their
calculations, since nothing is more certain and normal than
their blindness and incapacity to reason rightly. We may
therefore agree that, as a matter of fact, pleasures in every
CHAP, iv THE CLASSIFICATION OF COMMODITIES 89
respect equal, but some of which are present, and the others
remote, are variously estimated through error.1 But this
admission, though it can and must be made, in order to explain
real phenomena, consisting of human actions, can never be
adduced as explanatory of the phenomena of pure or rational
economics, i.e. of what would occur if all men were perfect
hedonists ; and hence phenomena (such as, e.g., discount and
interest are believed to be 2) based precisely on a difference in
the estimation of present and prospective commodities, must
be deemed non-existent in a state of pure economics, if they
were due to a constant error of valuation. But this is by no
means the case ; and though we do not deny the frequency of
every kind of error in hedonic calculations in practical life,
this hypothesis is unnecessary to explain the difference in the
estimation of the utility of present and prospective com-
modities ; the true reason of such difference being the vastly
greater certainty of the enjoyment of present, as compared with
prospective commodities. In other words, given the hypothesis
that a prospective and a present commodity are equal in every
respect save that of their maturity, there is no possible differ-
ence in the valuation of the two ; but this proposition, which
is true a priori (and which excludes, as regards these
commodities, under these conditions, the possibility of the
phenomena of discount and interest), is not invalidated by its
discrepancy with the facts of everyday life ; for the facts that
fall under our daily observation occur in an environment in
which there does not exist the postulated equality, in every
respect save that of maturity, of present and prospective com-
modities ; but on the contrary only the equality in duration
and intensity of the utility accruing from these commodities,
joined to a decided inequality as to the certainty ivith which it
is considered that they can be enjoyed.
Assuming its duration and intensity of utility to be equal,
a present commodity possesses greater utility than a prospective
commodity, because it is doubtful whether the expected com-
1 If the estimates are supposed to be vitiated through incapacity, then the
errors, unless there exist constant, or variable, causes of error in one sense rather
than in another, — which is either excluded by .the hypothesis, or proves it to be
insufficient, — must be of equal frequency and magnitude in either sense, and so
eliminate each other.
2 See post, part iii. chap. iii. § 3, p. 252.
90 THE THEORY OF UTILITY PART i
modity will be realised ; and even if it is, the point remains
doubtful, whether the life of the expectant individual will last
until the utility of the prospective commodity actually matures.
It remains also open to question, whether every other element
in the hedonic calculus is really correct ; whether, for instance,
at the future date the want to be satisfied will have continued
in, or come into, existence, and whether it will be of the same
intensity as was anticipated, and whether there may not then
be some other means of supplying it.
Having set forth these premisses by way of explaining the
deterioration of the utility of prospective commodities?- we
proceed to consider how it is measured hedonically, first speci-
fying its divisions. Present commodities always possess simple
productiveness, or to speak with more precision, the repeated
productiveness of present commodities is a prospective utility.
Thus, e.g., a fruit is a present commodity possessing simple
productiveness ; a dress, on the other hand, is a good possess-
ing present utility of a determinate magnitude, coupled with
a prospective utility which may be estimated by the party
interested. A chair, a tool, a house are direct and instru-
mental commodities possessing both present and prospective
utility ; and a cultivated field, at any other period than the
time of harvest, is an instrumental commodity possessing only
prospective utility. The same observation applies to a certificate
of rente, when the coupon due and payable has been detached.
1 The theory we have expounded of the deterioration of the utility of pro-
spective commodities is due to Ferdinando Galiani : "It was then recognised
that the intrinsic value was always variable, according to the degree of probability
that something would or would not be enjoyed, and it was recognised that 100
ducats out of one's hand, when there are 100 degrees of probability of their not
being lost, and 10 of their being lost, become 90 ducats in hand, and must be
reckoned as 90 ducats in any gaming contract or exchange. . . . Hence arose
the kindred phenomena of exchange and interest : the one being an equation
between money present and money distant in space, made with an apparent
surplus added sometimes to the money present, sometimes to that at a distance,
in order to equalise the intrinsic value of one or other, diminished by the lesser
convenience or the greater danger. Interest is the same equation made between
money present and money distant in time, time here operating in the same way
as space ; and the basis of either kind of contract is the equality of the true
intrinsic value. So true is this, that sometimes, in exchanges, present money is
worth less than money at a distance, and the exchange is said to be below par ;
and paper representing money, which after all is only future money, is often
worth more than coin, the surplus being called agio."— Delia Moneta, book v.
chap. i. p. 2-13, vol. ii. tome iv. Collez. Custodi.
CHAP, iv THE CLASSIFICATION OF COMMODITIES 91
Prospectively useful commodities may be endowed with a widely
varying repeated productiveness. There are obligations that
yield a determinate series of annual payments, others that
yield an indefinite series of such payments. There are com-
modities that are capable of rendering, for an almost indefinite
duration of time, the same service in the same manner, i.e. of
producing the same utility, and others that deteriorate within
a lapse of time that may often be fixed beforehand with much
precision. "We must therefore conclude that present and pro-
spective utility are found indiscriminately in direct, comple-
mentary, and instrumental commodities ; that commodities
are divided into commodities of simple productiveness,
and commodities of repeated productiveness, and that these
two classes are subdivided into commodities of present utility
and commodities of future utility.1 The subjoined table may
serve to make this classification more clear.
fin the present only (i.e.
-of simple productive- f actual)
ness ^ in the future only (i.e. pro-
TV c f J \ spective)
,.. ) u "r \ ( in the present and in the future
1 of repeated productive- I (i.e. actual and prospective)
ness j in the future alone (i.e. pro-
I ^ spective)
I Complementary do. do.
^ Instrumental do. do.
Now the determination of the total present or actual
utility of a commodity endowed with prospective utility, may
be effected in the following manner, in accordance with a rule
laid down by Ortes : 2 Let the total utility of a present
commodity be expressed by u ; then the utility this same
1 On commodities of single and recurring utility see "VValras's theory du
capital et du revenu, in his Elements d"e"conomie politique pure, Lausanne,
1889, 2nd ed. p. 197 ; also Wicksteed's Alphabet of Economic Science, pp. 131,
137.
2 In the solution of this problem I leave out of account a complication which
always occurs in real life. The service that a thing renders in a series of years is
not only affected by an element of deterioration, if it be estimated at the present
moment, owing to the increasing remoteness of the successive increments of
service, but each increment must have, at maturity, ITS OWN final degree of utility.
This is rightly insisted on by Dupuit : "Mais il y a des choses qui sont
susceptibles de rendre un certain nombre de services plus ou moins considerables ;
leur utilite est alors mesuree par la somtne, des prix qui nous auraient d&ermines
a nous en passer toutes lesfois que nous nous en sommes servis : les travaux publics
sont dans cette categoric," p. 192.
92 THE THEORY OF UTILITY PART i
commodity can produce during any given period of time t, c.cj.
a year, will be Eu, E representing a coefficient dependent on t,
and always less than the unit, i.e. a fraction of the same. The
coefficient E expresses the deterioration of the utility with
which the thing is endowed, owing to its being prospective
instead of present. The utility the thing may produce after
a second lapse of time equal to t, e.g. after two years, will be
equal to Eu, if we suppose that it is estimated at the end of
the first period t, and hence it will be equal to E2u at the
present moment}- Hence, if we suppose that a commodity may,
at intervals equal to t} yield n times a utility equal to u, its total
1 I have given to the rule of Ortes the modern form suited to it, and which is
found in W. Launhardt, Mathematische Begrundung der Volkivirthschaftslehre,
Leipzig, Engelmann, 1885, p. 6, § 2. The terms in which it is expressed by
Ortes are : "It has been observed that lands are equivalent to all the commodities
tliat can possibly be gathered from them and subsequently qualified, and that occupa-
tions are equivalent to all the actual commodities that may be derived from them
and qualified. Nevertheless, that does not alter the fact that those lands cannot
be compared with the actual goods, and so be exchanged for them as equivalents
each for the other. ... In fact, since as lands they do not immediately satisfy the
wants of any one, considered as the basis of occupations, and consequently of
commodities, they meet this want more mediately than anything else, and it thus
becomes the common measure of the lands and the occupations, or of the lands
and the actual commodities of which the occupations are the equivalent. ... It
is to be observed that the lands must be equivalent to tJie more actual and con-
sumable commodities, in comparison with the only ones susceptible of consumption,
inasmuch as the possible commodities are innumerable ; and that they must be
equivalent to less of actual and consumable commodities, inasmuch as these
innumerable commodities are not actual like consumable commodities. . . . And
as, on the one hand, the actual commodities are finite and the possible com-
modities infinite, it would seem that whatever number of the former could never
enhance the value of the latter or of any limited extent of land capable of pro-
ducing them. But, on the other hand, since the former commodities are all
present at once, and realised by means of the past occupations, and the latter are
only future and to be realised by means of occupations to come, the former will
for this reason be infinitely preferred to the latter. The infinite being thus
eliminated on either side, all the value of the possible, as compared with the
actual, commodities, with reference to the want felt for the one or the other, will
depend on a certain discretion exercised in the apprehension of the want for
either. ... In this way the lands which, compared with actual and finite com-
modities, are worth nothing as regards the supply of natural wants, are when
compared with the possible and infinite commodities to be extracted from them
by means of occupations, equivalent to twenty-five times more than the actual
commodities gathered and qualified in one year for the purpose of supplying the
said wants ; because possibly men apprehend their future and possible wants
twenty-five times more clearly than their actual and present wants."— Ortes, op.
cit. pp. 105-107, c. xiii. book iv. Confer Wieser, Der naturliche Werth, p. 134,
§ 38 ; and Bohm-Bawerk, Kapitalzins, Innsbruck, Wagner, 1884, iy. pp. 78, 79.
CHAP, iv THE CLASSIFICATION OF COMMODITIES 93
utility U at the present moment will be given by the following
formula : —
and the sum of this progression will be :
It is easy to understand how, whilst the total utility of a
present commodity is, cceteris paribus, greater than that of a
prospective commodity, the latter may far outweigh the
former, if its productiveness is manifold. Now, nearly all
instrumental commodities may be used repeatedly during a
prolonged period, and some for an indefinite duration. Thus,
e.g., a farm will yield yearly, with the concurrence of other
complementary and instrumental commodities, a quantity,
say of wheat. The utility of the quantity of wheat raised on
this farm affords the measure of the combined utility of the
farm and of the other instrumental commodities required to
produce the crop ; but since the land will presumably be
susceptible of being so used for ever, and the other instru-
mental commodities for a number of years, the total utility
of this combination of instrumental commodities is much
superior to the utility of only one year's crop, and must, as
indicated by the formula set forth above, be reckoned in pro-
portion to the present utility of the prospective and successive
increments of direct commodities that it will presumably yield
during a series of years. Commodities susceptible of repeated
prospective utility, as are almost all instrumental and many
direct commodities, have been erroneously termed capital.
This is already the second acceptation we have encountered
of this term.
§ 7. Of Economic Equivalents and of Genetic Groups of
Commodities
Many commodities render the same service, i.e. supply the
same want, either in the same or in a different measure. Now
* For a series of an infinite number of terms, i.e. : Eu + £ru + E3u ... we
7-7
get U=u——-£, when the series is convergent, i.e. E<1.
94 THE THEORY OF UTILITY PART i
if m units of A commodity are required to obtain the same
utility that is derived from n units of B commodity, these two
quantities are economic equivalents. Certain kinds of wood,
for instance, are equivalent to determinate quantities of coal
in the production of caloric or mechanical force ; and as a
building material, it is a substitute, in definite proportions,
for iron and stone. It is therefore evident that we can
tabulate economic equivalents, subject to such modifications as
the progress of the technical arts may require. The law of
economic equivalents, originated by Augustin Cournot,1 forms
the basis of the explanation of a large class of correlative
prices, i.e. of prices of commodities which cannot be modified
without a correlative modification (either consonant or anti-
thetical) in the prices of other commodities.
Another division of commodities into groups, which is
important for its bearing on the explanation of correlative
prices, and essential to the right understanding of the relation
between the final degrees of utility and the cost of production
of commodities, inasmuch as both these factors affect the value
of commodities, is obtained by noting under each instrumental
commodity the direct commodities derived from it, and vice
versa, above each direct commodity the complex of instru-
mental commodities that contribute to its production. In
other words we have to draw up genetic tables showing the
descent and ascent of instrumental and direct commodities.
§ 8. Jennings' s Classification of Commodities as Primary
and Secondary, and Laws based thereon
It has frequently been attempted to divide commodities
into classes denoting the order in which they are sought after
by persons who possess nothing at all, i.e. into classes arranged
with reference to an absolute scale of wants ; but it has been
found impossible to get beyond a vague description of wants
that have as their respective objects necessaries, comforts, or
luxuries, and an equally vague description of commodities
classified in accordance with this principle. It is impossible
1 Principes de la thtorie des ricJicsscs, A. Cournot, Paris, Hachette, 1863,
book i. chap. iv. §§ 33-35, pp. 61-64. Jevons, op. cit. pp. 145-148. Vide also
Menger, op. cit. pp. 90, 91.
CHAP, iv THE CLASSIFICATION OF COMMODITIES 95
to lay down any line of demarcation between commodities
that can, and commodities that cannot, be dispensed with
without prejudice to an individual's capacity for discharging
his proper functions; and yet one cannot designate as
comforts, and a fortiori as luxuries, any other commodities
than those respecting which it can be shown that they can be
discarded without detriment to one's physical and mental
capacities.1 On the other hand, if we relinquish our search
for the precise meaning of words in common use, and there-
fore wanting in precision, and take as our basis a physiological
fact, we obtain a classification similar to that vainly attempted
before, a classification most fruitful for economic science and
which has been already expounded in chap. iii. § 3. The
two classes of commodities which can be formed by refer- -
ence to their respective action on the nerves of special, and
on those of common sensation, will present some analogy
to those based on the distinction between luxuries and
necessaries, with this difference however, that no doubt can
be entertained in any case as to which class a commodity
should be assigned to. Let us therefore designate as primary
commodities such as are objects of common sensation, and
as secondary commodities such as are objects of special sensa-
tion. "We have then as corollaries of this classification the
following three principles which are a repetition, mutatis
mutandis, of the three theorems already expounded concern-
ing primary and secondary wants : —
1st. That primary commodities may exhibit all their useful
qualities, i.e. they may be to the fullest extent causes
of satisfaction or pleasure, even in the absence of
secondary commodities; and that, on the contrary,
secondary commodities cannot be enjoyed, unless the
desire for primary commodities has first been appeased.
2nd. That although the law determining the decrease of
degrees of utility, in proportion to the quantity con-
sumed (Gossen's law), applies to all commodities
1 That we have not advanced a single step in this direction may be seen at a
glance by comparing what was written on the subject by A. Genovesi, who was
appointed to the first chair of Political Economy that was founded, with what
is written nowadays by some of its most authoritative exponents, such as Wagner,
Grundlegung, 2nd ed. 1879, Winter, Leipzig, § 1, p. 9, § 96, pp. 138 et. scq.
96 THE THEORY OF UTILITY PART i
ivitliout distinction, the rate of decrease varies acconli IKJ
as the commodities are primary or secondary, without
however being uniform for either of the two classes.
3rd. That whilst the want of a secondary commodity can be
supplied by another secondary commodity, e.g. an optic
being substituted for an acoustic gratification, and vice
versa, no substitution can take place between primary
commodities, unless they are economic equivalents.1
§ 9. Of Commodities, the Available Quantity of which is
more or less than the Demand
If we designate by the term requirement or demand the
quantity of a thing that is required to satisfy a given want,
during a certain time, we may divide all commodities into two
classes, according as their available amount is more or less than
such demand.2 The demand thus comes to be the measure,
or the quantitative expression, of the magnitude of any want.
Since, in a state of civilisation, man experiences not only
present, but also prospective, wants, his demand for any
commodity is not merely the quantum which serves to ex-
tinguish his present want, but also the further quantum that
will be required to extinguish the want when it again asserts
itself; and in the case of the tribal egoist, such an additional
amount as may be necessary to meet the requirements of those
to whom his egoistic cares extend. Thus the time during
which the quantum of commodity must supply a want, in
order that the latter may equal or exceed the demand (as
denned by us), may be comparatively long, and may comprise
forecasts extending throughout years, a lifetime, or successive
generations. Now, there are certain things which, however
great the demand for them may be, are available in still
larger measure, for all men, and under nearly all circum-
stances. Thus, e.g., the air we breathe is diffused everywhere
in lavish abundance. Nevertheless a man may be so situated
with respect to it, that the amount of which he can avail
1 Jennings, op. tit. book i. chap. i. §§ 5-8, pp. 87-102 ; book ii. chap. i. § 36,
p. 211.
2 F. Galiani, Delia moncta, book i. chap. ii. pp. 58, 59, 1750, Collez. Cu-
stodi, vol. iii.; Ortes, op. cit. book iv. chap. viii. pp. 48, 49. The price of the
commodity is supposed to be zero.
CHAP, iv THE CLASSIFICATION OF COMMODITIES 97
himself is inadequate to his need, i.e. that for him air, or at
all events, good air is scarce. There are, however, many more
things the available quantity of which has always been less
than is required, or that have lapsed into the class of com-
modities the available quantity of which falls short of the
demand, after having for a brief period exceeded the latter,
either because the demand has increased with the advance
of civilisation and the growth of population, or because the
quantity originally available has diminished. Thus, for in-
stance, cultivable land which exceeds the agricultural require-
ments of a small community, comes to be inadequate for its
support as the population increases. A supply of drinking
water far exceeding the needs of a village, proves deficient as
the latter grows to the dimensions of a town. The spontaneous
produce of the soil which amply satisfies the wants of a
primitive race, proves inadequate to the requirements of their
more numerous and civilised progeny. A forest which affords
an inexhaustible supply of timber to its first despoilers,
cannot, in its reduced condition, satisfy the demand of later
comers. It is thus evident that commodities may pass from
the class of things in excess, to that of things in defect, of
the demand, in consequence of variations either in the de-
mand or in the supply ; so that this transition is not due to
any intrinsic quality of the commodities.1
Now, it is obvious that the homo ceconomicus will use
commodities existing in a quantity exceeding his need, in a
very different manner from commodities that exist only in a
quantity inferior to his need. Being assured that he can at
all times, and to any extent, satisfy his want of commodities
of the first class, he has no interest in appropriating any
portion of them either before or after the very moment when
he wants to use it ; nor has he any reason for doing anything
to preserve any portion of such commodities, or to take them
from any other person ; nor does there exist any scale of
urgency of his wants with respect to them. On the other
hand, as regards commodities the supply of which is short of the
1 To things that are superabundant as compared with our need, such as the
air we breathe, some economists deny the rank of commodities, even though
the superfluous portion may not be noxious. Strictly speaking, this is correct
as regards the portion in excess of the need, to which utility can only be ascribed
by such a stretch of the meaning of that term, as we pointed out when defining it.
H
98 THE THEORY OF UTILITY PART i
demand, knowing, as he does, that he cannot in any case com-
pletely satisfy his need of them, he must, to avoid increasing
his pain, do everything that may conduce to the preservation
of the supply, avoiding all waste, not parting gratuitously with
any portion, competing with others for the largest amount
obtainable, and satisfying his wants therewith in accordance
with their scale of urgency, i.e. appeasing first the most painful
ones. To put it briefly, we may say, that we can have an
economic management l only in respect of commodities of the
second class.
Commodities existing in a quantity inferior to the demand
are termed scarce, or riches, or valuables, to distinguish them
from the rest, which retain simply the generic name of com-
modities. They have also been called economic commodities,
onerous commodities, or exchangeable commodities, in contra-
distinction to non-economic, gratuitous, or non - exchangeable
commodities.
It is evident that commodities exceeding the demand have
always a final degree of utility either equal to zero, or negative.
It is equal to zero if the quantity exceeding the demand is not
injurious, i.e. if they are such that we can consume them to
satiety without experiencing any discomfort from the quantity
available in excess of our requirement. Such, for instance, is
the air we breathe. On the other hand, they have a final degree
of negative utility if the quantity exceeding our need requires
to be removed as being noxious, or as forming in some way an
obstacle to the increase of our happiness. Instances of such
commodities are : virgin forests, and other exuberant growths,
on soil that is brought for the first time under cultivation.
In such cases the redundant portion may even need to be
destroyed by fire. On the contrary, commodities the existing
quantity of which is short of the demand, always have a
positive final degree of utility, which is the greater, the more
limited their supply. Vice versd, they naturally present a
smaller total utility than the superabundant, but innocuous,
commodities. The diagram of scarce commodities will always
1 This distinction has been noticed by many economists, but chiefly by
Hermann and Walras senior. It is admirably expounded in Carl Monger's
Grundsdtze der VolkwirthschaftsleJire, Vienna, 1872, Braumiiller, chap. ii. § 3,
p. 51 and following.
CHAP, iv THE CLASSIFICATION OF COMMODITIES
99
assume, generically, the form of diagram XIX., and that of
the superabundant commodities the form of diagrams XX. and
XXI.
The two characteristics of riches most fertile in illations are
O
DIAGRAM XIX.
their cost and exchangeability. In fact, in proportion as certain
commodities fall short of our requirement, we are disposed
to submit, within certain limits, to a cost in order to procure
O
DIAGRAM XX.
them, or to procure a larger quantity of them ; for their in-
adequacy to such requirement occasions the continuance of certain
painful wants, and if these can be alleviated by the endurance
of lesser ones, i.e. if we can increase the amount of such com-
modities at our disposal by submitting to some labour or cost,
to do so is conformable to the hedonic postulate. This cannot
100
THE THEORY OF UTILITY
PART I
be the case with commodities existing in an amount greater
than the demand ; for the simple reason that there is no
possibility of pain being caused by their absence. This is the
DIAGRAM XXL
property we have in view when we say that riches have a
cost value. We must guard however against a varepov
TTpuTepov, which consists in assuming that the cause of the
value of these commodities is their cost.1 Their value is
determined by their aptitude to satisfy a want, and their cost
1 This paralogism has been, and still is, extremely common. Some of the
keenest thinkers, like Malthus, have been guilty of it, and others have even
persisted in it after their error had been pointed out ; e.g. M'Culloch, The
Principles of Political Economy, pp. 11-15, 5th ed., notwithstanding the
criticism contained in W. N. Senior's Principles of Political Economy. Before
him, Galiani, after having explained that value is a ratio dependent on the
utility and scarcity of things, i.e. on the proportion between the quantity of a
thing and the extent to which it is used, says: "But most men, and B.
Davanzati among them, reason thus : A natural calf is a nobler object than a
golden calf, but how much less is it esteemed ! I reply, if a natural calf were
as scarce as one of gold, its price would exceed that of the golden calf, as much
as the utility of, and need for, the former transcends the utility of, and need for,
the latter. . . . Again, it is said that a pound of bread is more useful than a
pound of gold ! I reply, that that is a shameful paralogism, arising from a
disregard of the fact that ' more, or less, useful ' are relative terms, and are
measured with reference to the various condition of the parties. If we are
thinking of some one who lacks both bread and gold, certainly in his OM6,
bread is more useful; but facts are in accord, and not at variance, with our
proposition, because no one so situated will reject the bread, and preferring the
gold, perish with hunger. Gold-diggers do not forget to eat and sleep. But
what is more useless than bread to a full man ? "—Galiani, op. cit. pp. 67-69.
CHAP, iv THE CLASSIFICATION OF COMMODITIES . 101
is due to the circumstance that, being thus valuable, the
existing amount of them is less than the demand. Their cost
is consequently the effect of a condition of fact in which these
commodities are with respect to us, or in which we are with
respect to them}
It is a corollary of their cost value that these commodities
are exchangeable. In fact, a commodity the existing amount
of which exceeds the demand, its cost being nil, will not be
purchased by any one in exchange for another commodity ;
for either the commodity given in exchange for the first is
also in excess of the demand, in which case neither party has
acted so as to diminish his pain, i.e. hedonically ; or else the
second commodity exists in a quantity less than the demand,
in which case one of the parties to the exchange has acted
anti-hedonically. On the other hand, a commodity the
existing amount of which is less than the demand, will be
purchased indifferently, the painfulness being equal, either by
means of some labour, or by the surrender of some other
valuable which would otherwise be enjoyed ; i.e. it will exhibit
its cost value under either of these forms indifferently. The
exchange power of such commodities is therefore only a form
of their cost value, and is termed generically value, and more
particularly exchange value, or value in exchange?
§ 10. Of Cost
The cost of a commodity is any pain that must be sub-
mitted to in order to obtain it. The forms that cost may
assume are various, but economically they are unimportant.
Often expenses may have to be incurred in order to obtain pos-
session of an object, that is, it may be necessary to forgo the
enjoyment of other commodities, either by transferring these
1 The expressions "gratuitous commodities" and "onerous commodities"
should be discarded (1) because they imply, or easily induce, the belief that the
cost is the cause of the diversity in our treatment of the two classes of com-
modities ; (2) because they imply a natural, juridical or ethical fundamentiim
divisionis, instead of an economical one, i.e. of a condition of fact: the
magnitude of the demand, and the magnitude of the available mass.
2 To be precise we should say that commodities the existing amount of
which exceeds the demand have an infinitely small exchange value. Condillac,
Le commerce et le gouvernement ; Guillaumin's Collection des princ. economistes,
vol. xv. p 253, note 27.
102 THE THEORY OF UTILITY PART i
to other persons, or by destroying their useful qualities.
Often, on the other hand, it may be necessary to perform some
labour, or to submit passively to some kind of pain or
abstinence from pleasure. Cost may always be considered as
a negative commodity in the sense explained in § 4 of the
present chapter ; and it may be well to investigate its pro-
perties and function in the form it most frequently assumes,
viz. that of labour, the form to which every other may be
reduced by a legitimate extension of the meaning of this term
beyond its ordinary acceptation.
Labour, in economics, means every painful human effort.
The same acts, i.e. the same exertions of a man's body or
mind, may be a labour or a recreation ; the one and sufficient
distinguishing characteristic of labour is its painfulness.1
Dancing is often a pastime, but for the dancing-master it is a
labour. The same applies to singing, fencing, etc. To be
laborious, a movement must be such that a hedonist will want
to desist from it, and that if he performs it, as is usually
the case, for the sake of some remuneration or reward, he will
want to reduce it to the narrowest limits compatible with
the attainment of his reward.2 Some writers have deemed it
necessary to add as a requisite of labour, in order to dis-
tinguish it from other acts, that it must be a means, and not
an end in itself; and further that it must consist of a series
of acts constituting a profession or vocation, and not merely of
any isolated act. But it is easy to see that the first of these
requisites is only a formula, — and not a very accurate one —
for expressing the fact that labour must be a painful act, and
that the second is not even correct, since even a single act
must be regarded as labour, when it is disagreeable.
Labour always consists ultimately of the movement of things
effected by means of some part of our body.8 We cannot act
1 Jennings, op. cit. pp. 113-118.
2 It has frequently been maintained that all commodities cost us something,
even if it be only what is involved in their appropriation and consumption. It is
obvious however that when the movements, or actions, or efforts by means of
which we consume or enjoy are themselves pleasant or indifferent, it is a mis-
nomer to describe them as labour or cost.
3 This principle was thus enunciated by James Mill : "It is found that the
agency of man can be traced to very simple elements. He does nothing but
produce motion. He can move things towards one another, and he can separate
them from one another. The properties of matter perform the rest. ... In
CHAP, iv THE CLASSIFICATION OF COMMODITIES
103
in any other manner on the things in the midst of which
we live, i.e. on our environment. The transformation of one
or more bodies, which is what is aimed at by any one who
labours, is always the result of the operation of forces existing
in nature independently of any effort of ours, and which we
have only brought to bear on our environment, in accordance
with our interest, by moving the things towards one another,
or separating them from one another.
Every voluntary movement of our body, provided it be
Y
n\
vi.
DIAGRAM XXII.
sufficiently protracted, becomes irksome, even though it may
originally have been most pleasurable. Our bodily movements,
in so far as they are pleasurable, are thus subject to the
general law of Gossen or Jennings of the decrease of the
degrees of pleasurableness of every sensation, in proportion
to its duration or quantity ; and the hedonic curve of
every movement is therefore generically identical with that
of every commodity. Let us, for instance, suppose any one to
walk, or fence, or read for pleasure. A first bout of each of
these exercises will give a hedonic result expressed by the
strictness of speech, it is matter itself, which produces the effects. All that
men can do is to place the objects of nature in a certain position." — Elements
of Political Economy, 3rd ed. p. 5. See also Verri, Meditaziani, sec. 3: "to
approach and to separate are the ultimate elements we find, on analysing the
idea of reproduction." Further, M. Gioja, Nuow prospetto, part i. chap. iv.
p. 32, Lugano, 1838.
104
THE THEORY OF UTILITY
PART I
positive ordinate 7/1^ (diagram XXII.). A second, third and
perhaps even a fourth instalment will still afford pleasure, but
always in decreasing measure, and a state of weariness cannot
but supervene ultimately, in which all sense of pleasure afforded
Y
Wi ;//2 ma vi\ X
DIAGRAM XXIII.
by the exercise will have vanished. Beyond this point we shall
have, with each further instalment, a growing sense of dis-
comfort, until a state of intolerable suffering will be reached.
DIAGRAM XXIV.
Graphically, this process is expressed by means of lengthening
negative ordinates : w2 n2, m3 n^ etc.
Now, we designate as labour every voluntary movement of
our body which is originally painful, or which has become pain-
ful though it was originally pleasant. Hence its graphic expres-
sion consists of ordinates which are all negative and increasing.
Usually they will be drawn in increasing order below the axis
CHAP, iv THE CLASSIFICATION OF COMMODITIES
105
of the abscissa, as in diagram XXIII. ; but it may be convenient
to produce them above the abscissa, as in diagram XXIV.
As in the case of positive commodities, the total utility pro-
duced by them increases in a lower ratio than the quantity of
them that is consumed, so in the case of negative commodities
the converse theorem holds good, viz. that their total disutility
increases in a higher ratio than their quantity ; and as for the
former we distinguish degrees of utility, so as regards these we
must take into account their degrees of disutility.
DIAGRAM XXV.
A painful act is performed by a hedonist only for the sake
of a commodity that will afford him a larger sum of pleasure.
Labour is for him only a means of increasing the sum of
enjoyment which he is able to procure. It is therefore
easy to indicate the point at which any labour will be desisted
from, and the point up to which it will be carried on by a
perfect hedonist.
Let there be indicated on the abscissa OX successive in-
crements of any given kind of labour: m^ m^ my ra4, rag, m& (see
diagram XXV.). The positive ordinates m^, m>2n2, etc., denote
the degrees of utility of the products of the increments of
labour to which they severally relate, viz. : m^ the degree of
106 THE THEORY OF UTILITY PART i
utility of the product of the increment of labour expressed by
Ora^ w2?i? the degree of utility of the product of the in-
crement of labour m^m^, and so on. The negative ordinates
miPi> ma2V e^Cv w*^ indicate the degrees of painfulness or
disutility of the increments of labour to which they relate,
viz. : mlpl the disutility of the increment of labour Oml ; m^p^
the disutility of the increment of labour m^mv and so on.
Now, as the degrees of utility of the commodity we obtain by
our labour decrease, whilst the degrees of disutility or painful-
ness of the labour increase, there must necessarily be a point
at which the degree of utility of the produce of the labour is
equal to the degree of painfulness of the labour. This point
is found in diagram XXY. between ms and ra4, because m4^4 is
already less than m^p^. The hedonist will not desist from his
labour before this point is reached ; but, on the other hand,
he will not protract his labour beyond that point, e.g. up to m5
or mff In fact, until the amount of labour is such that its
painfulness equals the enjoyment afforded by its remuneration,
we may increase our happiness by continuing to work. Even
this labour, though less productive, i.e. less remunerative than
formerly, will nevertheless result in a balance of pleasure. On
the other hand, once the point is passed when the pleasure
due to the fruits of labour is less than its painfulness, the
total amount of happiness is lessened with each ulterior
increment of labour. All such increments are therefore anti-
hedonic. ••• Naturally in the case of each individual, even on
the hypothesis of the same kind of labour and the same pro-
duce, the curves of the degrees of utility and disutility will be
different, according as his sensibility to fatigue and his wants
differ from those of other persons.
The intersection of the ordinates that denote degrees of
utility and of disutility may, having regard to the foregoing
observations, be also represented as in diagram XXVI.
The theorem we have been expounding may be briefly
formulated as follows : All labour will be carried on up to the
point at which the degree of utility of the commodity obtained
thereby equals the degree of painfulness of the labour itself, at
which point a hedonic maximum is realised. More briefly
still we may say : the final degrees of utility and of painful-
ness must be equal.
CHAP, iv THE CLASSIFICATION OF COMMODITIES
107
This theorem is also due to H. Gossen and R. Jennings,1
and was discovered later and independently by Jevons.
It is called the theorem of the final equivalence of positive
and negative degrees of utility.
To be obliged to submit to some cost in order to obtain
some (positive) commodity is the ordinary lot of man. Nearly
everything must be produced, in order that it may be adapted
to our wants ; it must be suitably modified, since we can create
nothing. Now, we may consider cost as a negative com-
modity, and the positive commodities obtained by means of it,
as the uses to which it is intended to be put. Then as the
DIAGRAM XXVI.
amount of cost, or effort, or toil we can submit to, within a
given period, is limited, i.e. determined by our physical con-
stitution, there presents itself, with respect to the negative
commodity we term cost, the same problem we have already
discussed with reference to positive commodities which can
be put to various uses, or to a determinate period of time
which may be apportioned among several satisfactions, i.e. the
problem of dividing the amount of labour we are capable of
within a given period (say twenty-four hours) among the in-
numerable uses to which we can apply it, so as to obtain a hedonic
maximum. And the position is the same, save for the greater
complexity of the problem. In fact we must consider in the
first place, that the various commodities which we can obtain
by means of the same cost or labour, present different totals of
1 Gossen, op. e#."pp. 34-39 ; Jennings, op. cit. p. 119 ; Jevons, op. cit. pp.
184-189 ; Launhardt, op. cit. pp. 89, 90.
108
THE THEORY OF UTILITY
PART I
utility, i.e. afford us different sums of satisfaction.1 Hence if two
equal abscissa, OX and OjXj (see diagram XXVIL), denote equal
quantities of labour, as regards duration and irksomeness, the
enclosed space above the former, OXY, will be, say, double the
enclosed space above the latter, viz. 01X1Yr In order to
simplify the problem, let us suppose that the curves denoting
degrees of utility are straight lines, or in other words, that
the equal decrements of utility of the products of labour corre-
spond to equal increments of labour. If, the duration of labour
being equal, its painfulness were the same whatever commodity
were produced, the available amount of labour must in that
X O
DIAGRAM XXVIL
X2
case be expended exclusively on the most remunerative pro-
duction, i.e. the one yielding the largest amount of gratification,
until such a degree of satiety were arrived at as to render it
equally profitable to devote a subsequent increment of labour to
the production of the same, or of another, commodity; and
from this point onwards the available amount of labour must
be so disposed of as to make the final degrees of utility pro-
duced by it equal, whatever commodities were produced.
1 Equal amounts of labour may afford different quantities of different pro-
ducts, and consequently different amounts of total utility, or equal quantities
of different products having different quantities of total utility.
CHAP, iv THE CLASSIFICATION OF COMMODITIES 109
But, as a rule, it happens that equal amounts of total
utility, derived from the production of equal or unequal
quantities of commodities, cost different efforts.
Hence the labour to be disposed of must be distributed in
the compound ratio of these two principles. That is, it is
necessary that the abscissae, OX and 01X1, instead of being
equal, should be to one another in the same ratio as the costs
required to obtain the total utilities denoted by the areas
above them, i.e. the abscissae must be such that equal portions
of them, denoting labour applied to the production of different
commodities, represent equal efforts. Now, if we modify the
abscissae in accordance with the ratio subsisting between the
costs (e.g. if we suppose the production of the utility denoted
by OYX to cost three times as much discomfort as the attain-
ment of the utility denoted by 01Y1X1), we must modify the
ordinates in an inverse ratio, in order to maintain the given
difference in the productiveness of satisfaction, or total utility,
of the two commodities in question. Our diagram XXVII.
will therefore be modified as follows : the abscissa OjXj is
reduced to one-third of its length and becomes 01X2, whilst
01Y1 is trebled in length and becomes OjY2, so that now equal
parts of the abscissae denote, for equal periods of time, equal
quantities of effort or cost.1
Thus the problem is reduced to the simple form in which
it is obvious, that the final degrees of utility attained must be
equal. The solution of this question is therefore, that the
labour to be disposed of must be so apportioned, that the final
degree of utility of every commodity produced will be equal to
the degree of painfulness that would be incidental to the said
commodity, if the last portion of each commodity were obtained
with the last increment of labour available. This theorem,
which is also due to Gossen, is called the theorem of equal
ratios of the final degrees of utility to the final degrees of pain-
fulness or cost?
1 See ante, chap. ii. § 6 ; also Wicksteed's Alphabet of Econ. Science, pp.
58, 124, 128.
2 Gossen, op. tit. pp. 40-45 ; Jevons, op. cit. pp. 198-201. The subject of
cost will be resumed in part ii. chap. iii.
CHAPTER V
OF WEALTH AND THE METHODS OF ESTIMATING IT
§ 1. Wherein the Wealth of Individuals consists ; how it is
estimated ; and why it is no Criterion of their Comfort
THE wealth of an individual, as we have shown above, is
the sum of the scarce, or costly,' or valuable things possessed
by him. We know that, on the one hand, his wants furnish
the criterion according to which some of the many things
that surround him are ranked as commodities, whilst on the
other, the quantity in which such commodities are available,
and the extent of the demand, are the criteria in accordance
with which some of these commodities are said to be scarce, or
costly, or valuable.
It is very easy therefore, in view of the precision with
which the various constituent elements of the conception
" wealth " are determined, to make up the sum of a single in-
dividual's riches. In fact this sum may be ascertained, either
by enumerating the metrical quantities of the several kinds
of riches he possesses ; * or by indicating their aggregate value,
i.e. taking the metrical unit of any one kind of his riches as
the unit of value, and indicating his aggregate wealth as a
multiple of such unit ; 2 or yet again by indicating the total
cost of reproduction of his riches, on the basis of any given
1 e.g. we may say that A has such and so many clothes, such and so many
provisions, objects of recreation, etc. ; in brief we may make an inventory
according to quantity and quality.
2 e.g. if A has 100 objects a, 200 objects /3, 300 objects 7, and the rates of
interchange of these objects are given as 3:2:1, we may select, say, 17 as unit
of value, and say that A possesses 1000 7.
CHAP, v METHODS OF ESTIMATING WEALTH 111
unit of painfulness ; l or finally, on the basis of the final
degrees of utility of the several quantities he possesses.
But however we may measure an individual's riches, since
these consist solely of commodities existing in a quantity
smaller than the demand,2 i.e. of commodities that are limited
or scarce, it is obvious that their amount is not a test of the
absolute comfort enjoyed ~by him ; or that we may speak in two
different senses of an increase or diminution of wealth. In
fact it is obvious that a man who found at his disposal, in
unlimited quantities, all the commodities corresponding to his
wants, would enjoy the maximum of comfort. At the same
time he would possess no riches. Similarly a man's comfort
would be increased, if after having had a limited amount of a
commodity, i.e. having been possessed of wealth, he should
succeed in acquiring an unlimited abundance of it, thereby
diminishing his riches. Whilst we find therefore that the
maximum of comfort is compatible with the absence of all riches,
we find also that an increase of comfort is compatible with a
diminution of riches.5 Were the progress of industry to
result in the reduction to zero of the cost of every product,
all riches would disappear, but would be replaced by universal
affluence. This does not warrant the conclusion that, in pro-
portion as the progress of industry succeeds in approximating
cost to that goal, and so increasing the available quantity of
commodities, wealth will diminish and comfort increase. For
commodities become, or cease to be, riches at a certain point,
viz. when demand and available amount are equated. Now, so
long as the progress of industry reduces, but does not annul,
the cost of particular commodities, and their available quantity
remains less than the demand, they do not cease to be riches ;
1 e.g. we may say that A's wealth is equivalent to the pain he would ex-
perience if, say, for 100 days he had to work 8 hours at a stretch at a given kind
of work, and under given sanitary and alimentary conditions, because that
amount of work would be needed to reproduce his riches.
2 Demand is here still intended to mean the quantity required at a price
equal to zero. Later on this term will signify " quantity required at a determined
price above zero" Vide part ii. chap. ii. § 1, note 1.
3 Maitland, Earl of Lauderdale, An Inquiry into the Nature and Origin of
Public Wealth, p. 41. J. B. Say, Cours complet d'econ. pol. pratique, ed. Gil-
laumin, 1840, vol. i. part iii. chap. v. p. 371 ; Traite, book ii. chap. iv. p. 364,
and book iii. chap. ix. p. 508, note 2 ; A. Clement, Didionnaire de Vecon. pol.
voix Richesse, vol. ii. p. 541.
112 THE THEORY OF UTILITY PART i
and the increase in the general wellbeing occasioned by the
perfecting of technical processes is not attended by any reduc-
tion of the classes of things that constitute riches, and still less
of the number of things comprised in each class. Nor can it
be said that certain commodities, limited in amount, are riches
in a lesser degree than others, because they are less scarce than
others, i.e. because their available quantity approximates more
nearly than that of others to an amount commensurate with
the demand. Their final degrees of utility, or cost value,
or exchange value, will however be less than those of the
other commodities ; and were such a modification of their
quantitative conditions to supervene, their cost value would
decrease in comparison with what it was, and with what that
of the other commodities is, and so too would their exchange
value. Unfortunately, so far, the progress of the technical
arts has only served to diminish the cost of things, ap-
proximating the available quantity of scarce things to the
demand, i.e. increasing the general wellbeing, but not in
proportion to the increase in the available quantity of com-
modities, and so without diminishing, but on the contrary,
rather multiplying riches.
The amount of a person's riches may be a test of his
comparative comfort, i.e. of his comfort as compared with that
of another person whose demand is the same as regards quantity
and quality, and who has not a greater abundance of unlimited
commodities at his disposal. In this case it is obvious that
the one who has more riches enjoys a greater degree of comfort.
These premisses are nearly always tacitly implied in discussions
on the increase or diminution of wealth ; and the subject
possesses special interest when, instead of private riches, we
are concerned with a nation's wealth. But in this case fresh
difficulties appear, which we shall proceed to examine.
§ 2. Of the Wealth of a Group of Individuals, or of a Nation,
considered at a given Time and Place
Hitherto we have dealt with univocal and well-defined
conceptions. But suppose now that we wish to indicate the
aggregate wealth of two persons, at a given time and pl;u •••.
Their wants must either be identical or different. If they be
CHAP, v METHODS OF ESTIMATING WEALTH 113
identical, the two persons may be considered as one. If how-
ever their wants differ, then also the tilings that are to le
deemed commodities with respect to each of them will le
different. A, for instance, is subject to attacks of malarial
fever, and quinine is for him a commodity ; B is exempt from
such attacks, and for him quinine is useless, or positively
hurtful. Therefore also the things that are to le deemed riches
with respect to each of them will be different. Now, how is it
possible to add up things that are commodities, and still more
things that are riches, if what with respect to one individual
should be included in the sum, must be omitted with respect
to the other, and vice versa ; in other words, how are we to
proceed in the absence of a subject whose wants may constitute
a univocal standard ? Evidently we must either give up the
attempt, or add up whatever is wealth for either of the two,
extending the conception of commodity so as to comprise what
is useful to some only of a group of persons.1 Given this
criterion, it will again be possible to have recourse to one or
other of the four methods mentioned above. It may often be
expedient (since the error would be slight) to suppose the
wants to be identical in quality. If instead of estimating the
wealth of two persons, at a given time and place, we want to
reckon up the sum of the wealth of the millions of persons
constituting a nation, the problem still remains the same ;
only the proposal becomes somewhat less objectionable, that
we should treat as commodities and riches, things that are so
estimated only by certain members of the group in question,
i.e. things that amongst a nation are the objects of produc-
tion and consumption.2
1 e.g. if for A the objects a, £, 7, 5, are commodities, for B the objects
7, 5, e, f, the sum of their riches is obtained by adding up a + /3 + 7 + 5 + e + f,
and not merely the common elements y + d. See ante, chap. iv. § 2, (d) (2) and (3).
2 The bibliography of this subject is very copious. It will suffice to indicate
the following works to the student : — A. de Foville, iZconomiste franqais, 28th
Dec. 1878, No. 52 ; 4th Jan. 1879, No. 1 ; 18th Jan. 1879, No. 3 ; 22nd Feb. 1879,
No. 8. P. Leroy-Beaulieu, eod. loco, 8th Feb. 1879, No. 6 ; 15th Feb. 1879, No. 7 ;
14th, 21st, 28th June 1884, Nos. 24, 25, 26. A. Soetbeer, Umfang und Verthei-
liuifj des Volkseinkommens, etc., Humblot, Leipzig, 1879. R. Giffen, Essays in
Finance, 1st series, 1882, London, Bell, No. 7, p. 161 ; 2nd series, 1886, Nos. 10,
11, p. 365. Y. Neumann-Spallart, UebersicUen der Welticirtliscliaft, 1883-1884,
publ. 1887, Stuttgart, Maier, No. 2, p. 8. Bulletin de VInstitut international de
statistique, tome ii. premiere livraison, 1887, p. 150. E. Engel. Bulletin de
VInstitut, etc., 1887, p. 50. R. Giffen, The Growth of Capital, London, 1889.
I
114 THE THEORY OF UTILITY PART i
In dealing with the valuation of the wealth of one or
more persons, or of a nation, there is no need to confine one-
self to the direct riches they possess, to the exclusion of
instrumental and complementary commodities. Only it must
be observed that instrumental commodities are equivalent to
future direct riches, that is, their direct utility is exhibited at
a later period than that to which the valuation relates. We
must, however, reckon potential, as an element of present,
wealth ; and since instrumental commodities (such as railways,
factories, ships, canals, etc.) must be produced through the
consumption of direct commodities (as will be shown in the
sequel), it may chance that a person will be poorer, for the
time being, than others in direct commodities, though he is
certain, at an early date, to possess all the more of them, in
respect of his having consumed a considerable quantity in the
preparation of instrumental commodities the productiveness of
which has not yet been developed.1
The riches of two or more individuals may be partly
several and partly common. The valuation of these common, or
collective, or public commodities, since they are such because
they are useful to all (besides being characterised by other
incidents that are unimportant in this connection), does not
present the difficulty of the absence of a subject whose judgment
determines their classification as riches ; 2 but this valuation is
rendered difficult in the case of a nation by the fact that they
are deemed, and are frequently declared by law to be, inalien-
1 The nation (or the individual) that undertakes the construction of railways,
roads, canals, factories, the improvement of land, the perfecting of the public
services, etc., produces instrumental commodities the fruits of which will be seen
in the course of time, but has actually consumed enormous quantities of direct
commodities and of instrumental commodities less remote than those produced,
in the form of food, clothing, lodging, raw materials, appliances, etc., and is
therefore provisionally poorer titan before as regards these direct commodities. It
may even happen that this provisional poverty in direct commodities should be
so severe as to become most painful, in which case it is termed a crisis due to
excess of consumption, or to excess of investments. This theorem is due to Pro-
fessor Bonamy Price, Cliapters on Practical Political Economy, 2nd ed., London,
1882, chap. iv. pp. 118-124. On a paradox which arises through not eliminating
instrumental commodities, see Sidgwick, Principles of Political Economy, book
ii. chap. xi. p. 375.
2 How this calculation should be worked out is the chief subject of Dupuit's
monograph on tolls, p. 209 ; but it is too long and subtle a question to be
discussed here.
CHAP, v METHODS OF ESTIMATING WEALTH 115
able. They may be scheduled like any other riches, as regards
quantity and quality ; their cost of reproduction may be
indicated ; the degree of utility they possess, — whether on the
hypothesis of their being equally useful for all the members
of the community, or on that of their having a different total
utility for each, — is determined like that of any other com-
modity belonging to an individual ; but the estimate of their
exchange value must in some cases be fictitious, since we are
dealing with commodities that are never actually offered for
sale, their utility for the nation being greater when they are
enjoyed directly by the community as immediate riches, than
if they were used l>y the latter as instrumental riches, i.e. as
the means of obtaining other direct riches in exchange.
The same difficulty may appear even in individual
economics, for a person may possess many commodities which
he considers it more profitable to utilise directly, i.e. to enjoy
them as direct or immediate commodities, than as means of
exchange, i.e. as instrumental commodities. And, strictly speak-
ing, we must consider as an instrumental commodity every thing
that has an exchange value ; and vice versa, we cannot attribute
any exchange value to a direct commodity, so long as it is so
considered by its possessor.1 Exchange value thus comes to be
a species of instrumental utility.
§ 3. Of the Difficulty of Comparing the Wealth of two or more
Individuals, or of two Nations at a given Period
No comparison can be made of the respective wealth of
two persons, until the riches of each have been severally
estimated ; and for the purpose of such estimate we must
reckon as riches all possessions which correspond to a want
and are available in a less amount than the demand. Now,
the wants of two persons may happen to be of a very different
character ; whilst their environments may be so diverse, that
a commodity which for the one is available only in a lesser
quantity, is available for the other in a larger quantity, than
the demand. One person, for instance, lives in a tropical
1 When a tiling is more useful as a direct commodity than as an instrument
of exchange, its value in use is commonly said to be greater than its value of
exchange, and the reverse in the contrary case.
116 THE THEORY OF UTILITY TART i
climate and needs neither furs, nor fuel, nor a substantially
built house ; the other, living in a northern latitude, requires
these means of protection against the inclemency of the
climate.1 One possesses an extent of land, and supplies of
timber and drinking water, far exceeding his requirements ;
the other has to procure these things by dint of the hardest
sacrifices, and by having recourse to every contrivance the
technical arts afford. Assuming such diversity to exist, it
would be perfectly correct to estimate the riches of each
separately, in accordance with the principles we have already
explained, and to pronounce that one to be the richer of the
two who possesses the larger sum of scarce or valuable things.
But this calculation would be an idle or barren operation, as
it would not conduce to any ulterior conclusion, and above all,
we should have to guard against the inference that the richer
individual enjoys the larger measure of comfort. It may in
fact easily be the case, that the schedule of one man's riches
contains direct and instrumental commodities which do not
appear in another's, simply because the second individual
possesses an amount of such commodities exceeding his need, i.e.
he can substitute for them direct gratifications. The sterility
of a comparison between the respective wealth of two persons
is enhanced in the case of two nations, on the like assump-
tion. One nation may possess onerous riches, where the other
disposes of gratuitous commodities ; one constructs canals,
where the other makes use of rivers and lakes ; one has to
procure coal for the development of caloric and motive power,
whilst these wants are supplied in the case of the other by
the heat of the sun and by waterfalls. The fertility of such
comparisons presupposes therefore an (at least approximate)
identity of wants and of available gratuitous commodities.
And these two conditions are realised approximately as
between individuals of the same nation, and as between
nations that are equally civilised and situated in similar
regions.
1 As regards the amount of food required by man to keep up the temperature
of his body, and to perform a certain amount of work, see Payen : Precis thcorique
et pratique des substances alimentaires ; Moleschott, Physiologic der Nahr/>n<r-
smittel ; and Paul de Saint Robert, Thermodynamique, 2nd ed., Florence, p. 400.
CHAP, v METHODS OF ESTIMATING WEALTH 117
§ 4. Of the Difficulty of Comparing the Wealth possessed at
different Times or Places ly two or more Persons or ly two
Nations.
The aim of investigations as to the wealth possessed by one
or more nations is generally to compare : either a nation's
present with its past economic condition, or the present
economic condition of two nations situated in more or less
diverse environments. The principal difficulties that beset
the latter problem were indicated in the last paragraph, but
to these a few others must be added, which will now be
mentioned in connection with the first problem. For these
two problems present exactly the same kind of difficulties, the
same obstacles applying in the one to the estimation of
differences between periods, as in the other to the estimation
of differences between places.
Supposing the above difficulties to have been eliminated,
viz. that of conceiving a sum of the commodities or riches of
two or more persons, and the difficulty arising from the
various extent of the conception wealth, according as wants
vary from individual to individual and from group to group,
or from nation to nation, and according as the ratio is of the
available quantities of commodities to the demand, — we en-
counter a further difficulty due to the fact, that from one
period to another the wants and the means of satisfying them
may have increased pari passu. Now, even admitting that
the new means to meet new wants are deficient in quantity,
so as to warrant their ranking as riches, it does not appear
satisfactory to say that one person, or a group of persons, or a
nation is, or are, richer with respect to another, or others, of
a preceding epoch, when the only difference in the conditions
of life is that expressed in the hypothesis. The conclusion
that wealth has increased cannot be avoided, but again it does
not coincide with an increase of comfort, and therefore, albeit
correct, it is destitute of practical value, being susceptible of
no ulterior deductions.
In the same way, the difficulty of the valuation is greatly
enhanced by the fact, that as times change, old wants and
corresponding riches disappear, whilst new wants supervene,
118 THE THEORY OF UTILITY PART i
inducing us to regard as riches what we did not so regard
before. We may therefore discover in the inventory of a
nation's wealth, a century ago, a number of things that are no
longer riches, and in its present inventory a number of others
that have become riches recently. At shorter intervals this
difficulty assumes the shape of qualitative changes in certain
commodities, which retain their name and enough of their
original properties to warrant their being regarded as still of
the same genus, but are so altered withal as to constitute
different species.
But the greatest difficulty is encountered in the research
for a unit of value common to both periods, for of the various
methods discussed hitherto for the valuation or measurement
of masses of riches, the only one that yields any result (in
cases where it can be applied) is that which consists in
expressing masses of wealth in terms of their exchange value.1
It is evident in fact, that the system of enumerating the metric
quantities of the various kinds of riches they possess, cannot
be utilised for the purpose of comparing the relative comfort
of two individuals or nations, even supposing these to exist
under identical conditions of time and place, for no sum can
be made of heterogeneous units of measurement, nor can we
balance the inferiority of the one in respect of certain kinds
of riches by his superior opulence in respect of certain other
kinds.
The system of mensuration based on the psychological cost
of the riches respectively possessed by the parties is also un-
suitable, for it presupposes the determination of such cost
collectively, whereas each individual can only determine it as
regards himself, the psychological cost of the wealth of others
not being open to his scrutiny. Moreover, as regards the
1 The following baseless objections have been made to this method : 1st, That
there can be no such thing as a sum of values, because value is the rate of inter-
change of two products. But the sum is not of rates of interchange, but of the
units which the various things constituting a mass of wealth represent, when
each is expressed by a number equal to the quantity of units of any one commodity
for which it is, or could be, exehn.i«j''<L 2nd, That if we duplicate or halve a
mass of wealth by duplicating or halving each of its parts, the sum of tJic -CU/IKX
does not vary, because the rates of interchange remain unvaried. The rates of
interchange do indeed remain unvaried, but f/tr sum of the units, reckoned as we
have c.'7/A/ ///.'/ above, is duplicated or halved, because the quantity of things is
duplicated or halved.
CHAP, v METHODS OF ESTIMATING WEALTH 119
valuation of wealth with reference to its final degree of utility,
if we would avoid the objection just mentioned to the system
of mensuration based on cost, we must obtain the variations
of the final degrees of utility from the tangible or visible fact
of the variations in the exchange values, of which after all, —
as we shall explain in the sequel — they are the true and
ultimate cause ; hence by this means we fall back on the
system of valuation based on exchange value. This does not
necessitate our finding a specific commodity that has not
changed in value during a lapse of time ; but it involves the
computation of the coefficient of the variation in value of any
commodity ; for we should then have a perfect standard for
the mensuration of values belonging to distinct epochs. The
methods of computing this coefficient of variation constitute
however, as yet, one of the most controverted and difficult
problems in economics.1
1 The best works on the subject are the following in order of excellence : 1st,
F. Y. Edgeworth, Report of the Committee appointed for the Purpose of Investigating
the best Methods of Ascertaining and Measuring Variations in the Value of the
Monetary Standard. Memorandum by the Secretary Brit. Assoc. Adv. of Science,
1887. 2nd, Giffen and Edgeworth, Second Report of tJie Committee, etc., and
Memorandum by the Secretary on the Accuracy of tlie proposed Calculation of Index
Numbers, 1888. 3rd, T. Lehr, Bcitrage zur Statistik der Preise, Frankfurt a/M.
Sauerlander, 1885, and Das Verfahren zur Ermittelung dcs Geldprcises und seiner
Aenderung. 4th, M. W. Drobisch, Ueber Mittelgrossen und die Anwendbarkeit
derselben auf die Berechnung des Steigens und Sinkens des Geldwertlies. Berichte
der K. Sachs. Gesellschaft der Wiss. : Math. Phys. Classe, 1871, I. Leipzig,
Hirzel. 5th, W. S. Jevons, Investigations in Currency ami Finance, Macmillau,
London, 1884, No. II. A Serious Fall, etc, and III. The Variation of Prices, etc.
PART II
THE THEORY OF VALUE
CHAPTEK I
OF VALUE ; HOW DEFINED ; ITS CAUSES AND WITHIN
WHAT LIMITS IT IS ARBITRARY
§ 1. Definition of Value
VALUE is the ratio in which the unit of measure of one thing
exchanges for a multiple, or fraction, of the unit of measure of
any other determinate thing. Thus, for instance, we may say
that the value of a certain kind of wheat, at a given time
and place, is thirty shillings, if a quarter of such wheat is
actually exchanged, at that time and place, for thirty
shillings. Value, in other words, is a mathematical propor-
tion between two quantities of wealth exchanged against one
another in a given market.1
It frequently happens that the quantity of one thing is
called the value of another; as for instance, that thirty
shillings is termed the value of a quarter of wheat. This mode
of expression is elliptical ; value is never an object possessed of
dimensions ; it is merely an abstract relation between two
quantities of two things. If however we bear in mind the
unit of measurement of one of the two things, we may, speak-
ing elliptically, indicate the quantity of the one as the value
of the other ; just as in mathematics we may say that b is to c
as d, instead of saying that & : c = d : I.2
1 Confer ante, part i. chap. ii. §4.
2 If we wish to indicate the quantity of one thing that we can purchase with
another, it is advisable to use, instead of the term value, the term price, as re-
commended by Verri, instead of restricting the meaning of this word to the
sole case in which the quantity we mean to designate as sold or purchased is a
sum of money. Verri, Sulle leggi vincolanti nel commercio del grani, p. 14,
Custodi, tome xvi. vol. ii. of Verri's works.
124
THE THEORY OF VALUE
PART II
The graphic expression of value is easily found. Let OX
and OY be two axes at right angles to each other (diag.
XXVIII. ). Let a distance Om1 be measured along OX, denoting
a determinate quantity of any given commodity, e.g. a quarter
of wheat. Along OY let a distance, Onv be measured, denoting
the quantity of some other commodity for which the quantity
Oml of the first commodity is- exchanged, say thirty
shillings. Through rax let a line be drawn parallel to OY, and
through n^ a line parallel to OX, and let the intersection of
these two parallel lines be at pr Then p1m1 is equal to nf),
and represents the quantity of one commodity (thirty
shillings) for which in a given market the quantity Om1 of
DIAGRAM XXVIII.
another commodity (a quarter of wheat) is exchanged. The
value is therefore the ratio of p1m1 to Omv i.e. p^n ,
Drawing the dotted line, Op., we perceive at once that •*
s
the trigonometric tangent of the angle pflm^ and that the
value and variations of the value are expressed graphically
by the direction of Opr Value may therefore be defined as a
trigonometric tangent, or an angular magnitude. In fact, so
long as Opl is in the former position, the rate of interchange
is constant. Let us suppose a quantity double Omv viz. Om2,
and let the corresponding ordinate intersect Opl produced at
p2 ; then p^m2 will be to Ow2 as plml to Om1 ; that is, we shall
have sixty shillings exchanging for two quarters of wheat,
which is the same ratio as before. Let us suppose, on the
other hand, that whilst P1'm1 remains the same, Om 1 is
CHAP. I
HO W DEFINED ; ITS CA USES
125
modified, or vice versd, that is, that more or less wheat than
formerly is given for the same amount of money, or that
more or less money than formerly is given for the same
quantity of wheat ; in either of these cases we shall have a
change in the direction of Opv that is an enlargement or a
diminution of the angle p10ml. In fact, let the quantity of
money that is given in exchange for a quantity Om1 of some
other commodity increase, that is, let n± rise to n2 on OY, and
let the parallels through n2 to OX, and through m1 to OY be
Y A
0*1
DIAGRAM XXIX.
intersected at p3 ; the rate of interchange will then be de-
noted by ^— -i, or by the trigonometric tangent of the angle
Om1
P30mlf i.e. the new direction of Op3. After this it is certainly
unnecessary to exhibit graphically the further case of a plus or
minus variation of Orap On: remaining unchanged ; suffice it to
observe that the owner of the commodity measured along OX
(i.e. the wheat) will express its value by means of the tangent
of the angle j^OX, whilst the owner of the commodity the
quantities of which are measured along OY (i.e. the money),
will express its value by means of the co-tangent of angle
^>1OX, or the tangent of angle ^OY.
It is evident from the foregoing, that all the possible
values of one commodity in terms of another, or all the
126 THE THEORY OF VALUE PART n
possible rates of interchange between two commodities, are
expressed graphically by the revolution, from right to left,
within a quadrant (~ j , of a straight line passing through 0.
In fact the nearer P (diagram XXIX.) approximates to OX,
as for instance in the position OP1? the smaller does Pj^, and
the larger does Ora^ become, that is, the less does the value
become of the quantity of commodity denoted by the length
of Orar If OPj were to coincide altogether with OX, that
would mean that the price of a quantity OM of commodity had
become zero. On the other hand, the more P approximates
to OY revolving from right to left, and passing through
the positions P2 — P3 and reaching the position P4, the
smaller does OM become, passing through the values
Om2 — Om3 — Om4, whilst P2m2 — P3ra3 — P4m4 increases. In
other words, the quantity of commodity OX that is given in
exchange decreases, and the quantity of commodity OY that is
received in exchange increases. If OP coincides finally with
OY, that signifies that the price of a portion of commodity
OX is infinitely great, because the OM's have become zero,
and the PM's have attained a maximum length.1
Value being the rate of interchange of commodities, it
does not really exist, save at the moment when the exchange
takes place ; just as the utility of a thing only exists at the
moment when it is consumed or enjoyed. But just as utility
is attributed to things that can be consumed and are reserved
for that purpose, so too we speak of the value of one thing with
respect to another, when it can be exchanged for it in deter-
minate proportions. It will be said, for instance, that the
1 Let the tangent a = -. If the arc increases from 0° to 90°, the ordinate y
increases and the abscissa x decreases ; therefore the tangent increases with the
arc, but not as the arc. For a = Q, we have y = Q and aj=l. For a = ^ we
have y = x. For a = - we have y=\ and x = Q. Therefore tangent 0° = 0;
tangent ^= tangent 45°= 1; tangent ^ = tangent 90°=- = 00. This system of
graphic notation has been devised by Professor Marshall, The Pure Theory of
Foreign Trade, chap. i. § 4, p. 7, and note to § 5, p. 9. Unfortunately Professor
Marshall's eminently ingenious studies have only been printed for private
circulation, and consequently are not accessible to the public. Jevous,
op. cit. p. 90.
CHAP, i HOW DEFINED; ITS CAUSES 127
value of a quarter of wheat is thirty shillings, if it is
well known that it could be exchanged for thirty
shillings, where it is, at a given moment. In other words,
value comes to mean the exchange power of a thing, or its
potential rate of interchange (its " permutative power," as the
old Italian economists call it ; its purchasing power, as it is
termed by English economists). It must be observed, that
in speaking of the exchange power of a thing, or of its value
in this generic sense, we mean the MAXIMUM QUANTITY of the
other commodity which we can obtain in exchange for the first.1
It is consequently absurd to speak of the value of a thing
as one of its qualities, unless by the quality of a thing we
mean the condition of fact that it is exchangeable for some
other thing, in a determinate ratio.
Value, being the rate of interchange of two things, pre-
supposes the existence of at least two things ; but it does
not presuppose the existence of at least two persons, and
hence, a fortiori, it does not presuppose the existence of a
human society. In fact, given even an isolated individual,
he can, with a view to maximising his comfort, submit to
some labour in order to obtain some product ; and by so
doing he exchanges the pleasure he enjoyed, either in the
form of rest, or of absence from that pain which is the con-
comitant of work, for the greater pleasure arising from the
fruits of his labour. This, as the reader will remember, may
be briefly formulated in the theorem due to Ferrara, that
value is, in the first instance, a phenomenon of individual or
isolated economics. It follows that all that group of economic
theorems which are commonly expounded under the title of
" production of wealth," and which set forth the conditions
under which the production of wealth gives rise to hedonic
maxima, are simply phenomena of value, in individual and
social economics.2
1 Wordsworth Donisthorpe, Principles of Plutology, Williams and Norgate,
London, 1876, chap. ix. p. 133.
2 The so-called production of wealth is a form of exchange, and the so-called
theory of the production of wealth belongs to the theory of exchange. This is a
necessary conclusion from Ferrara's doctrine, though it appears to be contro-
verted by Martello, op. cit. § 66, pp. 243-245. See on the same subject Cour-
celle Seneuil, Traite theorique et pratique a" economic politique, tome i. livre ii.
chap. i. § 2, p. 220, Aniyot, Paris, 1867.
128 THE THEORY OF VALUE PART n
§ 2. Various Uses of the Term " Value "
It is of no consequence whatever to the economist to know
what other meanings are attributed to the term " value/' either
in popular language, or in other branches of knowledge. Such
researches are of interest for the lexicographer, and will yield
diverse results for different languages ; in economics it is
essential that no doubt should exist as to the sense in which
a word is used in that science, whether with or without the
sanction of the philologist and man of letters.1
" Value " has been frequently, and is still, used as a
synonym of total utility ; since the time of Adam Smith,
however, this meaning has been more commonly expressed
by the term " value in use," " value " alone being used rather
to denote "exchange value."
Moreover, and particularly of late, Austrian and
German economists have used the term " value " to express
what has hitherto been known as the final degree of utility, or the
utility of the last small increment of a quantity of commodity,
or yet again the importance for an individual of the satis-
faction afforded him by the last small increment of a commodity
in his possession, or the importance for him of the pain he is
saved from by the possession of such last small increment. In
order to avoid misapprehension, instead of using the term
" value " alone, when the final degree of utility is meant, they
say " subjective value," and when the rate of interchange is
meant, they say " objective value." There is nothing to be
said either for or against these vagaries, which neither assist
nor impede the progress of economics.
Lastly, the term " cost value " is frequently used to denote
either the cost, that is the sum of pains of every kind, that
the production or appropriation of a thing has occasioned to
its possessor ; or the rate of interchange which a commodity
1 It is absurd to oppose the introduction of neologisms in economics, when
they are useful ; and they are useful when they help to differentiate concepts
which were not differentiated before, or to differentiate them better than they
were differentiated before. In natural science no exception is taken to new
terms, such as potential, ergal, Kraefte-Funktion, and hundreds of others.
Why should economists object to util (Fisher), or to ophelimity (Pareto),
amount index (Marshall) and the like ?
CHAP, i HOW DEFINED; ITS CAUSES 129
would bear, if it were exchanged at a price that would exactly
cover the expenses of production.
§ 3. Of the Causes of Value, or the Conditions of every
Exchange
An exchange, not being in itself an act affecting our
senses pleasurably, is not made for the mere love of barter ;
and between persons supposed to be perfect egoists it only
takes place to the extent that it realises the hedonic postulate,
i.e. in so far as it augments the quantity of utility at the dis-
posal of the persons making it. Hence, an exchange cannot
take place, unless certain conditions exist, which are for that
reason termed the causes of value, and which constitute at the
same time the limits within which exchanges occur.
Thus, suppose two persons, each possessing a determinate
quantity of different commodities (e.g. the one raA, the other
riB), it is necessary that there should be a difference in the
comparative degrees of final utility of the commodities in
question; and more particularly that each individual should
attribute to a proportionate part of the other s commodity a
greater final degree of utility than he attributes to a propor-
tionate part of his own commodity (e.g. that the possessor of
mA should attribute a greater final degree of utility to a
first - of B than he does to the last — of A he possesses ;
n m
and that the possessor of riB should judge in a different sense).1
1 We say "a difference in the comparative degrees," because the difference
must be as between Primus's appreciation of the final degree of utility of a
portion of A and of a portion of B ; and the same, mutatis mutandis, as regards
B ; and not as between Primus's and Secundus's appreciation with respect to
portions of A or B. Respecting the fundamental condition for the possibility
of an exchange, see any economist from Pompeo Neri onwards. Among
modern Italians, more particularly Ferrara's 50th Lecture, and among foreign
writers, Jevons, op. cit. pp. 129-132, and Gossen, op. cit. pp. 82-90. It is not
necessary, as will be seen farther on, chap. iii. § 2, that the possessor of nE
should .judge in an opposite sense. He only needs to judge differently. He
may, just like the possessor of ??iA, attribute to - of B a greater final utility
than he does to — of A, if he only does so in a different measure than the
possessor of mK does. A difference in comparative final utilities is the one
sufficient condition for exchanges.
K
130 THE THEORY OF VALUE PART n
This is expressed in popular language by saying, that
each party to a sale or exchange must deem the article pur-
chased or received in exchange to be more useful to him
than the thing sold or given in exchange. If this con-
dition is realised, each party augments, by means of the
exchange, the total utility at his disposal ; since each sub-
stitutes for the quantity of utility he loses in parting with
a portion of his wealth (the former, —A, the latter -B),
m n
another quantity of wealth, which in his estimation has a
greater final degree of utility, i.e. the part he receives of
the other's wealth.1
1 Two observations may perhaps be expedient to explain the conditions to
which every exchange is subject. If Primus is disposed to give, say a book
to Secundus for six shillings, and Secundus is disposed to give, say six
shillings to Primus for the book, it is not allowable to infer that Primus
values six shillings more than Secundus does, nor that Secundus values the book
more than Primus. It may even be the case that, although Primus parts with
the book in consideration of the six shillings, nevertheless he values it more
than Secundus. This is so, if Primus values the six shillings much more than
the book, and yet values both the six shillings and the book much more than
Secundus. Let us suppose, for instance, that Primus is willing to work three
days to obtain the book, but six to earn the six shillings, and that Secundus
is only willing to work one day to acquire the book, and half a day to earn the
six shillings ; in that case it will certainly be to Primus's advantage to offer
the book and accept the six shillings, and to Secundus's advantage to take
the book and to give the six shillings, although Primus desires the book much
more than Secundus. A rich man, for whom money possesses consequently a
comparatively small final degree of utility, will be disposed to pay at an auction
twice or three times as much for a piece of furniture as a poor man, who needs
it much more, but who at the same time needs money much more than the rich
man.
The fact of an exchange therefore only proves the existence of a disparity
between the comparative degrees of final utility for either contracting party ; but
it teaches us nothing as to the final degree of utility of a commodity for the
two parties respectively. This proposition, as we shall see, has been known by
the name of the law of comparative costs since the time of Ricardo, and one is
surprised to find Bohm-Bawerk treating it as a novelty.
The parties to an exchange always completely ignore the relations subsist-
ing between the total utilities of the two commodities that are the subjects of
the exchange, and fix their attention always exclusively on the relations subsist-
ing between the final degrees of utility of the two commodities, which relations
supply the motives of their actions.
In fact, each party to an exchange asks himself, whether what he receives ADDS
a larger quantum to his stock of enjoyments than is TAKEN AWAY by what he has
to give. The difference between the total utility of a commodity and the
degrees of utility of the several increments thereof, we have so far expressed
CHAP, i HO IV DEFINED; ITS CAUSES 131
It may be well to observe that the degrees of utility-
attributed by either party to the several increments of his
own and of the other's commodity are not necessarily identical,
or that the curves of the degrees of utility of the two com-
modities in question are not only two, common to both the
contracting parties, but four, inasmuch as for either party
there is a special scale of decrease of the degrees of utility of
successive increments of either commodity. This at least will
usually be the case, for only by a most fortuitous combination
of circumstances will two persons experience absolutely the
graphically by the difference, between an area and the ordinates that may be
drawn within it. A fuller treatment of the subject may be interesting and
useful. If we imagine an abscissa divided into equal parts, we may express,
by means of such divisions, increasing quantities of a commodity ; so that, for
instance, the first division will signify one quarter of wheat, the second two
quarters, the third three quarters, and so on ; and not, as before, the first
division a first quarter of wheat, the second division a second quarter, and so
on. Next we may imagine an ordinate drawn to each division, proportionate
in height to the total utility of the quantity of commodity denoted by it ; so
that, for instance, the division denoting one quarter has a small ordinate, the
division representing the two quarters, one perhaps twice as long, and possibly
even longer, and so on. These ordinates will go on increasing up to a certain
limit, beyond which they will decrease rapidly, forming, if their extremities
are joined, a curve like that of diagram XIV. Thus we shall have expressed the
total utility, no longer by an area, but by a curve, which is a function of the
quantity of commodity in question. This is expressed by the formula y=f(x),
in which y denotes the total utility and x the quantity of commodity ; so that
for each value of x, say for one, two, or three quarters of wheat, we shall have
a value of y, i.e. a corresponding quantity of total utility. Now if we draw a
tangent to this curve at any point, its inclination expresses the ratio in which the
curve increases (or decreases) at that point ; and since the curve expresses total
utilities in function of a quantity of commodity, the inclination of the tangent
expresses the DEGREE OF UTILITY that an infinitesimal increment of commodity
possesses for one who is already supplied with the quantity of commodity registered
by the abscissa, when cut by an ordinate passing through the point touched by
the tangent. Hence the degrees of utility are expressed on such a curve by its
INCLINATION, and this inclination in turn is a function of the quantity of com-
modity. This is expressed by the formula y=fl(x}. Now, the inclination of
every tangent to any point of the curve is expressed numerically by dividing
the ordinate, which touches the point of contact of the tangent and the curve,
by the abscissa limited by the last-mentioned ordinate and the intersection of
the tangent with the axis of the abscissae ; in other words, the inclination is
given by the trigonometric tangent of the angle formed by the axis of the
abscissae and the tangent. Hence we may construct a curve to represent the
inclination of every possible tangent, in function of successive increments of
commodity, viz. the curve already known to us of degrees of utility, y=f1(x).
Coming now to the instance given in the text of Primus possessing wA and
Secundus possessing ?iB, suppose Primus has given xA to Secundus in exchange
132 THE THEORY OF VALUE PART n
same wants, and theoretically a hypothesis of this kind would
be a superfluous, if not indeed an erroneous, postulate.1
It must further be observed, that the quantity of utility
lost by either party to an exchange by the delivery of a
portion of his commodity to the other, may sometimes be very
slight, or indeed even nil ; as would be the case if such a
quantity were possessed of the commodity in question, that
the degrees of utility of one or more increments thereof
would be very small, or equal to zero, or even negative ;
whilst, on the other hand, the quantity of utility gained may
be very great, as would be the case if no portion of the com-
modity acquired by the exchange were as yet possessed by
the person so obtaining it, and if each increment thereof cor-
responded to an intense want.
So long as conditions subsist that make trucking advan-
tageous to both parties, exchanges will be effected. Each
exchange however tends, cceteris paribus, to destroy these
conditions, by diminishing the disparity between the compara-
tive degrees of final utility of the two commodities in question.
In fact, as with each exchange Primus's stock of the A com-
modity diminishes, its final degree of utility for him increases ;
whilst as simultaneously Secundus's stock of the same com-
modity increases, its final degree of utility for him diminishes.
for ?/B ; then Primus remains with (m - »)A + 7/B, and Secundus with
(?&-2/)B + o:A. The final degree of utility of his stock will be expressed for
Primus by f\m - x)<j>l(y), and that of Secundus will be similarly expressed.
But Primus (and the same applies to Secundus) will not cease exchanging,
until the final degrees of utility of the two commodities possessed by him,
A and B, become equal; i.e. until he finds f1(m-x)'dx = (f>l(y)'dy. In fact
before the exchange, for Primus /X(A) was less than /J(B) ; but as with each
successive exchange the quantity of B acquired by him increases, and the
quantity of A remaining to him diminishes, a point of equivalence must be
reached of the final degrees of utility of A and B, which puts an end to his
interest in exchanging with Secundus. See Wicksteed's Alphabet of EC. Sc.,
pp. 20-36 ; Walras's Elements d'ec.pol. pure, pp. 3-21 ; Pareto's Cours d'ec. pol.,
§§ 47-55.
1 Hence, if we express the degrees of utility of increments of A and B by
numerical indices like Menger (pp. 163-167), we must give a different initial
index and series to the indices that denote the degrees of utility of increments
of A and B for Primus, and to those that denote the degrees of utility of in-
crements of A and B for Secundus. This is done by Walras, Launhardt,
Jevons, and Gossen. See e.g. Jevons, op. cit. pp. 103, 115 ; Launhardt, § 4,
p. 16 ; Gossen, op. cit. pp. 82, 83; Walras, 10th and llth Lectures, pp. 121-141,
fildmcnts d'&onomie politique pure, 2nd ed.
CHAP, i HOW DEFINED; ITS CAUSES 133
And vice versd, as Primus's stock of the commodity origin-
ally possessed by Secundus increases, whilst Secundus's stock
decreases, the said commodity will have decreasing final degrees
of utility for Primus, and increasing degrees for Secundus ;
whence it follows that after one or more exchanges, a time
necessarily comes when Primus, on the one hand, attributes an
equal final degree of utility to the quantity remaining to him
of the A commodity, of which he was the original possessor,
and to the quantity he has acquired of the B commodity ;
whilst Secundus, on the other hand, attributes an equal
degree of utility to a further increment of Primus's com-
modity and to a fresh increment of his own. As soon as this
point of the equivalence of the final degree of utility of his
own original commodity, and of the commodity acquired from
the other party, is attained in the estimation of either, the
necessary condition and object of any further exchange fails.1
However obvious these considerations may be, it seems advis-
able to add some observations to make the matter still clearer.
In the first place, it must be noticed 2 that, as the result of
the exchanges effected, all disparity between the comparative
degrees of final utility of each unit of commodity for one of
the parties cannot have disappeared, if it still exists as regards
the other parti/. A student's first impression is that Primus
may have obtained enough of Secundus's commodity, so as
not to desire to continue trucking, whilst Secundus has not
yet had enough of Primus's commodity, and would be willing,
in order to obtain a further portion of it, to give up some
more of his own original commodity. This impression, how-
ever, does not bear careful scrutiny. The levelling up, or
down, of comparative degrees of marginal utility can only
happen for Primus, if it occurs simultaneously for Secundus.
All the marginal utilities of all the commodities possessed
by Primus will only then be equal, when all the marginal
utilities of the commodities possessed by Secundus are equal
to one another. Suppose, for a moment, this were not so,
and that, at a given ratio of exchange, Primus should have
bartered just so much of his original commodity against that
1 Gossen, op. cit. pp. 84, 85. See the criticism of Gossen's formula in
"Walras's Elements d'tconomie pure, 2nd ed. p. 189.
2 See Pareto's Cours d'economie politique, 1896, Lausanne, § 52.
134 THE THEORY OF VALUE PART n
of Secundus, as not to be disposed to continue the transaction,
whilst it should still be profitable for Secundus to continue
trucking, evidently Secundus would be disposed to alter the
former ratio of exchange to his own disadvantage, that is to
say, he would be willing to continue exchanging, at a new
ratio more favourable to Primus. And Primus, supposing
him to be a homo oeconomicus, must agree to do so ; for if the
equivalence of marginal utilities existed at the former ratio,
it cannot at the same time exist at the new one. Moreover,
it must be understood that our formula of the equivalence of
the comparative degrees of final utility comprises, for instance,
the case of the (B) commodity possessed by Secundus being so
valuable for Primus, that he does not stop trucking, until he
has exchanged the whole of his own commodity (A) for more or
less of Secundus's commodity (B). In this case, albeit the final
degree of utility of Secundus's commodity (B) decreases for
Primus, as he goes on acquiring successive increments thereof,
whilst that of his own commodity (A) increases with each
successive alienation, nevertheless the degree of utility of the
smallest increment of his own commodity (A) is less than the
degree of utility of the last increment of Secundus's com-
modity (B) that he can still obtain by exchanging A for B, and
the equivalence of the final degrees of utility is established
between a negative quantity of A and a positive quantity of
B. At bottom, this case, far from having anything singular
or exceptional about it, is the one which realises in the most
typical and perfect manner imaginable, the supreme condition
of every exchange ; for in it we have to do with a person for
whom the disparity in the comparative degrees of final utility
not only exists, but is so great as to be infinite, the final degree
of utility of any increment of his own commodity being, in his
estimation, equal to zero, in comparison with the final degree of
utility of the quantity of the other person's commodity that he
can purchase with his own.1 Finally, it must be observed that
1 This case is very frequent ; every trader in a specific commodity is ready to
sell even the whole of his stock to his customer at the same rate of interchange
at which he lets him have a part, and even at a rate still more favourable to the
customer. Qud the customer, on the contrary, the former case is realised, i.e. the
equivalence of the final degrees of utility of the commodity he gives (usually
money) and the one he receives, is attained comparatively early. The second
case is unfortunately often realised in exchanges of services for things. Rather
CHAP. I
HOW DEFINED; ITS CAUSES
135
only in exchanges of commodities divisible ad infinitum can
there be, in the case of either party, a perfect equivalence of the
comparative final degrees of utility. For, if we suppose
the case of indivisible commodities being exchanged for other
indivisible commodities (indivisible commodities being such as
deteriorate economically, if physically divided, such as animals,
glass-ware, instruments, etc.), or of indivisible being exchanged
for divisible commodities, it may easily occur that the equiva-
lence of the comparative degrees of final utility is not attained,
b c d
DIAGRAM XXX.
for one or both of the parties, save for fractional quantities of
the indivisible commodities. Let us suppose, for instance, with
Jevons, that a person wants ink and can only buy it in bottles
of at least one shilling each ; that three bottles certainly have
a greater degree of final utility than three shillings ; and that,
as in diagram XXX., the first, second, and third bottles have
the decreasing degrees of utility Oafe — alocjf — bchg, whilst the
three shillings which must be given to acquire them have the
increasing degrees of utility Oalk — alml — Icnm.
than have no wages, a workman accepts any wage, because, given the division of
labour and the specialising of trades, skill in one particular craft cannot at once
be turned to account in another ; and a person whose labour is not in request
cannot himself set to make what he requires for his sustenance, and which he
would have purchased with the wages of his labour. Therefore the final degree
of utility of the latter soon sinks to zero in comparison with the final degree of
utility of any wage.
136 THE THEORY OF VALUE PART n
Under these conditions an exchange will certainly result in
an increase of utility for the person to whom the curves refer,
denoted by the area enclosed by klmnhgfe.1 But if we suppose, —
as is likewise denoted by the curves, — that a portion of a fourth
bottle, say two-thirds, would be still more useful to him than
two- thirds of a shilling ; but that the last third of a fourth
bottle would not be more useful to him than the last third of
a fourth shilling, will the exchange of a whole fourth bottle
for a shilling take place, or not ? In the first place, it must
be observed that, if it does, the perfect equivalence of the com-
parative final degrees of utility is at an end; for the final
degree of utility of the ink will be expressed by id, and that
of the shilling by Pd ; if it does not take place, even then
there is no perfect equivalence between the comparative degrees
of utility, for the final degree of utility of the ink will be he,
whilst that of the shilling will be nc. In other words, either
less ink will have been bought than there was reason for buy-
ing, or else a little more. A determination will be come to, in
one or other sense, according as the inconvenience or dissatis-
faction caused by buying, or not buying, is less, i.e. according as
the area cdPn or cdih is greater.2 If instead of obtaining the
ink in exchange, say for money, it were produced directly, and
the technical conditions were such that it could only be pro-
duced in quantities of a determinate magnitude, the same
aTropia would result. In fact, all that is required is that we
should consider the ascending ordinates, which before meant
shillings, as now denoting increments of labour (confer part i.
chap. iv. § 10).3
1 Respecting this area, which is most important, especially for the science of
finance, something will be said hereafter. At present it is sufficient to observe
that it is called residual utility, and that its nature and functions were first
recognised by J. Dupuit, De V influence des piages sur Vidilite des votes de com-
munication, p. 195 and following, No. 107, tome xxv. of the Annales des ponts ct
clwMss&s, 2nd series, 1849, Paris, Carillan-Gceury. See ante, part i. chap. iv. § 3.
2 Jevons, op. cit. p. 136.
3 Respecting the fundamental condition for the existence of whatever exchange,
viz. that the final degree of utility of the thing received must be greater than that
of the thing given, we would observe, that probably there is a much 'more funda-
mental law, which comprises this one as the genus comprises the species. We
may take it that all wealth is always exchanged, and that if any one refuses to
sell at the price offered to him, he is himself the purchaser of his own substance,
i.e. the party wlw makes the best offer. Hence it would follow that the supply is
always equal to tJie demand, without any distinction as to effective or non-effective,
CHAP. I
HO W DEFINED; ITS CAUSES
137
§ 4. Of the Maximum and Minimum Limits of Value in
Isolated Economics and in the Economics of Exchange *
Given the existence of conditions necessary to realise an
exchange, many rates of interchange, or many prices, are com-
patible with them, both in isolated and in social economics.
We propose to examine this proposition, first on the
hypothesis of the exchange of only two commodities by two
persons ; secondly, on that of isolated economics ; and thirdly,
O M X
DIAGRAM XXXI.
on that of an exchange taking place between several competing
vendors and one purchaser, or many competing purchasers
and one vendor. This arrangement of the subject appears to
be the most natural.
I. In diagram XXXI. let the quantity of a commodity
possessed by Primus be marked off on OX ; and thus
let OM denote, for instance, a quarter of wheat, and let the
quantities of some other commodity possessed by Secundus be
marked off on OY ; for instance, let ON denote thirty shillings.
or that all wealth is always and necessarily sold, or that it is sold unconditionally,
and therefore even in the absence of the alleged fundamental condition set forth
above (Donisthorpe, loco cit.}.
1 See Giovanni Rossi, La matematica applicata alia teoria della ricclwzza
sociale, 1889, Reggio Emilia, vol. i. No. 2, 2nd essay.
138 THE THEORY OF VALUE PART n
Now, assume that Primus is not disposed to sell a quarter of
wheat for less than thirty shillings, and that because for him
the final degree of utility of thirty shillings is not greater
than that of a quarter of wheat ; in that case he would
naturally accept with pleasure any greater quantity of money
he could get in exchange for his quarter of wheat. If we
draw through N a parallel to OX, and through M another to
OY, which will intersect at P, we shall say that the least
advantageous rate of interchange Primus will be satisfied with
, ON . PM
is given by , or by — , or yet again by the tangent of
OM OM
the angle POM (see part ii. chap. i. § 1).
As regards Secundus, let us suppose him willing to give,
if need be, much more than thirty shillings for a quarter of
wheat ; but however great may be in his estimation the final
degree of utility of a quarter of wheat, having regard to his
need and to the scarcity of the supply, and however limited
may be for him the final degree of utility of money, having
regard to the abundant supply he possesses, as compared with
his requirements, nevertheless both will necessarily be definite,
and we may suppose that Secundus would not pay more than
thirty-five shillings for a quarter of wheat.
Let the price of thirty-five shillings be expressed on OY
by the segment OQ, and let the parallel to OX through Q inter-
sect the parallel through M to OY at Pt. Hence the least
advantageous rate of interchange that Secundus will be satis-
fied to accept is given by — — , or by - — , or yet again by the
OM OM
tangent of angle KOM.
As Primus and Secundus are actuated solely by hedonic
motives, the first will try to obtain for OM of wheat a higher
remuneration than PM of money, and the second to pay for
OM of wheat less than KM of money ; but each of them will
prefer to accept any rate of interchange within these limits,
rather than forgo the exchange. Now, it is clear that between
PM
the minimum rate of interchange - — , which is the least ad-
OM
vantageous that Primus will accept, and the maximum rate
of interchange — — , which is the most advantageous that
CHAP. I
HOW DEFINED; ITS CAUSES
139
Secundus will agree to, there are an infinite number of rates
which satisfy the requirements of both parties, and which
they will rather accept than lose the opportunity of an
exchange. In fact, the prices of thirty-one shillings, thirty-
two, thirty-three, thirty- four, and up to thirty-five shillings
per quarter, are within the difference between the comparative
degrees of final utility for both parties. Graphically, it is
evident that every ordinate greater than PM, and less than
EM, satisfies the conditions
given by the magnitude of
the final degrees of utility
of money and of wheat for
the two parties respectively,
and that an exchange may
be effected with mutual, but
diverse, advantage for every
position that OP duly pro-
duced, i.e. the side of angle
POM may assume, revolv-
ing about the fixed point 0
to the left, from P to E.
Supposing OX and OY
in diagram XXXII. to be DIAGRAM XXXII.
equal to the unit, as we
have already done in diagram XXIX., and supposing a
quarter of wheat to be denoted by Qm, and the minimum
price that Primus will accept in exchange for it by pm, and
the maximum price that Secundus will give by rm, we
shall produce Op to its intersection with the curve YX at u,
and similarly Or to v. Then, drawing the parallels to OY
through v and u and obtaining the right lines vs and ut,
we shall say that the prices acceptable to both parties lie
between the tangent vOX and the tangent wOX, i.e. between
vs ut
the maximum rate of interchange pr- and the minimum pr . *
(js \}t
These prices, which are acceptable to both parties, are denoted
by the dotted lines perpendicular to OX through s and t.
The reader will readily observe that ~ = ^ and that =.
J Os Otii Ot Om
140 THE THEORY OF VALUE PART n
Jevons,1 and with him Menger, have held that only anti-
economic factors (i.e. above all the multifarious circumstances
that render one individual more expert at bartering than
another2) will decide which among the infinite possible ratios
will actually be selected. This is open to question, if we
consider that Primus and Secundus cease trucking when, for
one or other, the equivalence of the final degrees of utility of
the commodities given and received is attained ; but that for
each of them this equivalence is attained in respect of different
masses of the commodity they give and receive, according to
the rate of interchange. In fact the final degree of utility of
wheat rises for Primus with each sale, whilst that of money
falls ; now if the rate of interchange is very favourable to
Primus, the equivalence of the final degrees of utility is
reached at a moment when he is in possession of a quantity
of wheat that is still considerable, with a low final degree of
utility ; in other words, the final degree of utility of money will
have fallen much more rapidly than that of wheat will have
risen, and equivalence will have been reached at a point which
leaves to Primus a large total utility both for ivheat . and for
money. If, on the contrary, the rate of interchange is very
unfavourable to Primus, the equivalence of the final degrees
of utility is reached only after he has parted with a large
amount of wheat, i.e. when the latter has a high degree of final
utility and presents a comparatively small total utility ; in other
words, the final degree of utility of money will have fallen much
less rapidly than that of wheat rose, and equivalence will have
been reached at a point at which the final degrees of utility
are different from what they were in the former case.3 Now,
1 Jevons, op. cit. p. 134 ; Menger, op. cit. chap. v. § 1, pp. 175-179 ; Bohm-
Bawerk, " Grundzuge der Theorie des wirthschaftlichen Giiterwerths, Theil II.
n. iii. A. p. 492 ; Jahrb. fur Nationaloek. und Statistik. Bd. xiii. Heft vi.
1886.
2 On the subject of anti-economic factors of exchange, see principally :• A.
de Johannis, Analisi psicologica ed economica del valor e, Venezia, Fontana, 1883 ;
and the same author's Discussioni economiche, Padova, Drucker, 1881, part ii.
chap. vi.
3 In exchanges of indivisible things, or of indivisible for divisible things,
the arbitrariness of the rate of interchange exists effectually within given limits.
Primus does not wish to sell a book for less than six shillings, whilst Secundus
is willing to pay as much as ten shillings. Between six and ten any price is
possible. But that arises from the fact that in these exchanges we have not
even a true equivalence of the comparative degrees of final utility.
CHAP. I
HOW DEFINED; ITS CAUSES
141
if this is true, it is not impossible that a hedonic maximum
may be furnished by one among the infinite possible rates of
interchange ; and perhaps even that it may vary according as
the object is to realise a cumulative maximum of the satisfac-
tions of Primus and Secundus, or two distinct, but compatible,
maxima for Primus and Secundus ; in which case this is the
rate of interchange that hedonists will agree in selecting
among the many.1 The theoretical point of equilibrium can
be determined graphically as follows :—
Suppose an object is bargained for between Primus and
o
DIAGRAM XXXIII.
Secundus. Let all possible prices be measured on OM
(diagram XXXIII.). Say OP is the least price Primus is
disposed to receive. If he were to accept a smaller price,
say OQ, let his loss in utility be measured by QE. The
loss, in terms of utility, of any price between 0 and P will
be measured by an abscissa like QR, infinite, perhaps, in 0
and zero at the price P. Curve PRS measures this loss in
terms of utility for any possible price between zero and P.
Now, let Primus obtain a price greater than P, say T. His
gain in utility will be measured by TU. The curve PUV
1 Jevons says that among the many prices possible, the choice must be left
to an arbitrator. But according to what criterion can this arbitrator decide,
unless there exists at least one hedonic maximum ? On the other hand, if this
exists, it will be found by two perfect hedonists, without the aid of an arbi-
trator. It is also worthy of note, for the solution of this problem, that a rate
of interchange exists, among the many possible ones, that presents a stable
equilibrium (Marshall, Foreign Trade ; note on Mill's treatment of an exceptional
case, p. 15 ; see post, chap. iii. § 7), as may be perceived at once by treating
the question graphically. See G. Rossi, op. cit. pp. 67-69.
142 THE THEORY OF VALUE PART n
will measure his gain in terms of utility for any price above
P. The whole curve SEPUV is Primus's curve of utility
(negative or positive) in function of the price obtained by him.
Let Secundus not be disposed to give more than OB for
the object which is being bartered. If he had to pay more
for it, he would be a loser. Let his loss be measured, for any
price above B, by the abscissa which cuts the curve BF. At
a price 00 he would lose CD. If he can get the object for
less than B, he is a gainer, in terms of consumer's rent, or
utility. If he got it for OE he would gain EG. The curve
FDBGK is a curve of utility in function of price for Secundus.
A bargain is possible, id est, advantageous for both parties at
any price between P and B. But only a price corresponding
to the intersection of the utility curves SV and FK, the price
OH, is an equilibrium price, giving both parties equal gain in
terms of utility. And this price must be reached, if both are
perfect hedonists, because at this price the strain is equal on
both sides.
II. The theorem we have demonstrated as regards two
contracting parties, holds good also in isolated economics. If
Primus is struggling against the niggardliness of nature, he
will say to himself that a quarter of wheat is worth, say,
twenty days of labour, but certainly not more than thirty.
Therefore he will grow wheat, not only on land requiring
twenty days of labour, but also on such as necessitates more,
up to thirty days ; but he will do without wheat if he finds
only land that requires thirty-one days of labour. And, just
as in the case of an exchange by two persons, if he finds land
that yields its return with twenty-two days' labour, he will
let other land which requires more lie fallow, provided the
quantity of wheat the most fertile land can yield suffices for
his wants.
III. The above theorem naturally holds good likewise in
the case of more than two parties to an exchange, i.e. of two
vendors and one purchaser, or of two purchasers and one
vendor, and so on for any number of parties. Only, it must
be observed that if the disparities in the comparative degrees of
final utility differ as regards the several parties, the arbitrari-
ness of the rate of interchange will always have as its limits
the rate of interchange of the seller or purchaser to whom
CHAP, i HOW DEFINED ; ITS CAUSES 143
such rate is most unfavourable, and the rate of interchange
of the seller or purchaser who stands next as regards the
unfavourableness of such rate to himself.1 The following
observations make this obvious.2 Suppose that whilst
Secundus is the only purchaser of wheat, and the maximum
price he is disposed to give is thirty-five shillings per quarter,
— as in the previous example, — an offer of wheat is made,
not only by Primus, but also by Tertius.
Primus is unwilling to sell a quarter of wheat for less
than thirty shillings. Now, if Tertius attributes to a
determinate quantity of money a higher final degree of utility
than Primus does, or a lower final degree of utility to a
quarter of wheat, i.e. if the comparative degrees of final utility
of whatever determinate quantities of vjJieat and money present
a greater disparity in Tertius 's estimate than in that of Primus,
he will be disposed to give a quarter of wheat for say, even
twenty-eight shillings. On that hypothesis, any price between
thirty and thirty- five shillings will meet the requirements of
Primus and Secundus, and any price between twenty-eight
and thirty-five those of Secundus and Tertius. Now, it is
evident that Tertius will prevent Primus, by means of his
own more advantageous offer, from effecting any sale with
Secundus at a price ranging between thirty and thirty-five
shillings, and that Primus will prevent Tertius from effecting
any sale with Secundus at a price between thirty and thirty-
five. Therefore the price can only vary between eighteen
and nineteen ; or in other words, the arbitrariness of the
rate of interchange is limited below by the minimum rate of
interchange of the vendor to whom such rate is most unfavour-
able (Tertius), and above by the minimum rate of the vendor
who stands immediately above him as regards the lowness or
unfavourableness of the rate of interchange to himself.3 If
1 Readers already acquainted with the Ricardian theory of comparative costs
will at once perceive its analogy to that of the comparative degrees of final
utility. In fact the two theories are substantially identical. This is one
proof among many that could be adduced to show that the classic or orthodox
economics of Ricardo, Mill, and Cairnes, can only be improved inform, but that
in substance it remains what these great masters have made it.
2 Menger, chap. v. § 2, pp. 179-186.
3 Ferrara calls Primus's price the cost of economic reproduction ; but we shall
return to this later.
144 THE THEORY OF VALUE PART n
now a fourth vendor, Quartus, were to offer a quarter of
wheat of equal quality at twenty -five shillings, he would
shut out Primus and Tertius from any sale ; but the latter's
offer would in turn prevent his getting a price above twenty-
eight shillings, or rather twenty-seven shillings and eleven
pence ; and again the arbitrariness of the rate of interchange
would only range between the minimum prices that Quartus
and Tertius are satisfied with respectively. Graphically,
these conclusions are shown with the greatest clearness. In
fact, returning to diagram XXXI., as long as Primus was the
only seller Secundus had, the rate of interchange could have
any magnitude within the limits of the angle EOM — POM.
With the advent of Tertius, the arbitrariness of the rate
of interchange is given by POM — SOM, i.e. by the difference
between the angle POM, which expresses the minimum rate
of interchange accepted by Primus, and the angle SOM which
expresses the minimum rate of Tertius.1
If Tertius, instead of being satisfied with a minimum
price (twenty-eight shillings) below that of Primus (thirty
shillings), had wanted a higher minimum price than Primus,
say thirty-three shillings, Secundus would have exchanged
with Primus, but the arbitrariness of the rate of interchange
would have ranged between thirty and thirty-three shillings.
Having ascertained the limits of the arbitrariness of the
rate of interchange in the case of several vendors competing
for one purchaser, let us determine what limits apply in
the case of several purchasers dealing with one vendor.
Graphically, the solution of this problem is contained in the
proof of the last one, since if the ordinates change place with
the abscissae, all that has been said applies to the new case ;
but if it is desired to repeat the demonstration briefly, let us
suppose, that whilst Primus who owns the wheat will not part
with it for less than thirty shillings per quarter, Secundus is
willing to buy even at thirty-three shillings, and Tertius even
at thirty-five shillings. Primus will not deal with Secundus
1 It must not be said that the arbitrariness of the rate of interchange is
restricted, for the disparity may be even greater than before. For instance,
Titius does not want to sell a book for less than seven shillings ; Caius is
willing to pay even ten for it ; the disparity then is three shillings. But now
Sempronius is willing to sell a similar book for one shilling ; the disparity in
this case is six shillings, i.e. 7-1, which is more than in the former case.
CHAP, i HO W DEFINED ; ITS CA USES 145
at a price between thirty and thirty-three, because Tertius will
always offer him one shilling more than his competitor. Nor
can Tertius deal with Primus at less than thirty-three shillings,
because Secundus's offer at that figure will prevent him.
Therefore the rate of interchange can only fluctuate between
thirty-five and thirty-three ; i.e. it will be limited above by the
maximum rate of the purchaser to whom the rate of inter-
change is least favourable, and below by the maximum rate
of the purchaser who stands next as regards the elevation of
the rate of interchange. If now a Quartus arrived offering to
buy at forty shillings, the arbitrariness of the rate of inter-
change would be limited by forty and thirty-five.1
To sum up the fundamental propositions expounded in
this and the preceding paragraph, we may say : 1st, That an
exchange can only take place if, in the estimation of both
parties, there is a difference in the comparative degrees of
final utility of the commodities to be exchanged ; 2nd, That
within assignable limits, the rate of interchange is arbitrary ;
3rd, That in the case of several purchasers, or several vendors,
the interchange takes place between those for whom there
is the greatest difference in the comparative degrees of final
utility ; or in other words, that the conditio sine qiid non for
a purchaser or seller who wishes to shut out a rival from the
transaction, is the existence of a difference between his own
comparative degrees of final utility greater than the difference
between his rival's comparative degrees of final utility.
It only remains for us to observe that if, in the case of
1 With reference to this discussion, the note to the end of the preceding
paragraph should be borne in mind ; for if this exposition were developed on
the lines there set forth, there would be no excluded competitors, i.e. com-
petitors that remain empty-handed ; but this conception is too subtle to be
expounded in this manual. Moreover it must be observed that at an auction
there is the same arbitrary limit to the price ; which however is variously
fixed, according to the nature of the auction, at the maximum or minimum
limit of the above-described arbitrary limit of the rate of interchange. Thus,
in a Dutch auction,Jthe thing to be sold is first offered at a higher price than
any purchaser is likely to give, and the price is gradually abated until a bid
is obtained. For this reason each purchaser hastens to offer the highest price
he is willing to give, lest he should be forestalled by another. In the English
system of auction, the biddings commence at a minimum price, and are succes-
sively increased, until only one purchaser remains who is willing to give that
amount. See Marshall, Economics of Industry, London, Macmillan, 1881, book
iii. chap. vi. § 2, note p. 200.
L
146 THE THEORY OF VALUE PART n
the two or more purchasers dealing with one vendor, or in
that of the two or more vendors dealing with one purchaser,
the comparative degrees of final utility present equal differ-
ences, only anti-economic factors can decide with which pur-
chaser in the one case, and with which vendor in the other,
an exchange will be concluded.
CHAPTEE II
DETERMINATION OF THE EATE OF INTERCHANGE IN THE
RESPECTIVE CASES OF MONOPOLY AND OF FREE COMPETITION
§ 1. Determination of the Rate of Interchange of Monopolised
Commodities and Distribution of the Latter amongst Competitors
LET us designate as a " monopolist " the sole owner of whatever
commodity, in whatever given, but determinate, quantity ; and
in the same market with him let there be many owners of
various quantities of some other commodity ; and let there
subsist between them and the monopolist the fundamental
condition required to determine exchanges. This set of
circumstances gives rise to the following questions, viz. : At
what prices can the monopolist sell various quantities of his
commodity ? or, What quantities thereof can he sell at each
of such prices ? and, In what manner will the quantity sold be
distributed among the many competing purchasers ?
It is desirable to solve these problems, in the first
instance, on the simplest hypotheses imaginable, as regards
the final degrees of utility for the several parties, before
formulating more general solutions ; and accordingly to follow
Menger in his analysis of an example.
Let A then be a monopolist having any given quantity of a
commodity. Let B1 be a purchaser for whom a first portion
of A's commodity has a final degree of utility expressed by
a numerical index, say 8, or in other words, let him be
willing to pay eight shillings for it ; whilst a second in-
crement of the same commodity possesses for him only a
final degree of utility expressed by 7, so that he is unwilling
to give more than seven shillings for it. For a third increment
148 THE THEORY OF VALUE PART n
he is only willing to give six shillings, and for each successive
increment he will only give one shilling less than for the
preceding one. We shall accordingly measure along an
abscissa the successive equal increments of A's commodity, and
by means of ordinates proportionable to the prices B1 is disposed
to pay for each increment, we shall denote the final degrees of
utility that the respective increments have for B1, i.e. the prices
he is willing to pay for them.
Let B2 be a purchaser whose demand l for A's commodity
is less than that of B1, or in other words, is such that for a
1 I use the term demand advisedly, in order that the reader may have the
opportunity of making himself acquainted with the precise import of this word
in economics. Here demand is to be understood in the sense of scale of the
degrees of utility of successive increments of a commodity, and a varicdion in the
demand consists of a variation in this scale, consequent on a variation of the
wants and tastes of consumers. A determinate scale of the final degrees of
utility, though not noticed otherwise, is a postulate whenever we discuss the
effect of variations of prices in a determinate market, and we then say that a law
of demand is postulated, i.e. a determinate scale of degrees of utility, and a
variation of this scale is termed a variation in the law of demand. The classic
economists, who attach specific meanings to technical terms, designate a variation
of the scale of degrees of utility (as for instance, the fact that the wants of B2
become greater than those of B1, or that those of B1 are so modified that he is
disposed to pay nine for what he formerly considered worth eight at most) a rise
or fall of the demand, that is of the law of demand. On the other hand when,
given a determinate scale of degrees of utility, or a determinate law of demand,
prices rise or fall, this fact is referred to as an extension or restriction of the
demand. When prices fall, a determinate scale of wants being given, more
consumers purchase ; when, on the contrary, prices rise, fewer consumers
purchase. Here we have to do with the extension and restriction of con-
sumption in accordance with a given and determinate law of demand ; but this
extension or restriction of consumption is termed an extension or restriction of
the demand, which gives rise to endless ambiguities. See ante, part i. chap. iii.
§ 2, note and text, post, part ii. chap. iii. § 1. Also Walras, op. cit. p. 494 ;
Wicksteed, op. cit. p. 98.
By the use of graphic systems these ambiguities are avoided. In fact a law of
demand is a determinate curve uniting the extremities of the ordinates that
denote the degrees of utility of successive increments of a commodity for a
consumer, or for a group of consumers. The rise or fall of the demand is the
uniform or irregular, upward or downward trend of this curve, i.e. the line
formed by connecting the extremities of successive longer or shorter ordinates.
The extension or restriction of the demand is, on the contrary, as will clearly
appear from the following exposition, determined by a straight horizontal line
parallel to the abscissa and more or less proximate to the latter, which marks oil'
the quantity of commodity that will be consumed by one consumer, or by a
group of consumers, according to the level of prices, whilst the curve denoting
the final degrees of utility of successive increments of commodity for the con-
sumer, or group of consumers, remains the same.
CHAP, ii DETERMINATION OF INTERCHANGE RATE 149
first portion of A's commodity he is disposed to pay seven
shillings, for a second increment six, for a third five, and so
on. We shall accordingly mark off on the same abscissa, by
means of proportionate ordinates, the prices that B2 is disposed
to pay for successive increments of A's commodity. Let B3
be a purchaser whose demand of A's commodity is still less
than that of B2, i.e. such that for a first portion of A's com-
modity he is disposed to pay only six shillings, for a second
five, for a third four, and so on.
Further, let B 4 be a purchaser of a first portion of A's
commodity at the price of five shillings, B5 a purchaser at the
price of four shillings, and so on ; the price that each of these
purchasers is disposed to pay for each successive increment
diminishing by one shilling. If we now so arrange these
numerical data in a diagram, as to indicate by means of abscissae
the successive increments of A's commodity, and by means of
ordinates the prices each purchaser is disposed to pay for
successive increments ; so that the prices offered by B1, B2, B3,
etc., for successive increments of A's commodity come to be
disposed in the form of a curve of the final degrees of utility,
we shall have the following Mengerian table, which coincides
with the diagrams of demand of Cournot, Jevons, Marshall,1
and other writers who have treated this subject analytically,
or by means of graphic systems. Now, it is evident from
what was stated in the preceding paragraph, that if A offers
for sale only one increment of his commodity, it will be
1 A. Cournot, Principii inatematici della teorica della ricchezza, chap. v. § 26,
p. 101 et seq.; Biblioteca dell' economista, vol. ii. ; A. Marshall, The Pure Theory
of Domestic Values. The Mengerian table is read diagonally ; the price, for instance,
that B1 is disposed to pay is found, for the first increment, at the top of the first
ordinate, at number eight ; for the second increment, to the right and lower down,
i.e. at the top of the second ordinate, at number seven ; for the third increment,
still farther to the right, and a square lower down, at the top of the third
ordinate, at number six. The price that B2 is disposed to pay for a first in-
crement is found on the first ordinate, at number seven ; what he is disposed to
pay for a second increment, on the second ordinate, i.e. still proceeding towards
the right and descending by one square to number six, and so on. The price
that B3 is disposed to pay for a first increment is found at number one on the
first ordinate ; the price he would be disposed to pay for a second increment
should be sought to the right on the second ordinate, one square down, i.e. it
would be zero, and is therefore omitted from the table ; for a third increment it
would be - 1, i.e. two squares below the third ordinate. This table constitutes the
pans asinorum for students of economics.
150
THE THEORY OF VALUE
PART II
purchased by B1 at a price between seven and eight shillings.
If the monopolist is disposed to sell three increments of his
commodity, the second increment would not be purchased by
B1 at more than seven shillings, nor the third at more than
six; whilst B2 is disposed to give seven shillings for a ihsi
increment and six shillings for a second. Therefore, B1 will
be exposed to the competition of B2 in the purchase of two
* V
Demand of B1 . . .
B2...
B3...
B4. . .
B5 . . .
8
CO
icremcnt
4t.V Increment
5 ^Increment
o
•v
1— 1
p
o
I
ert
7V.1 Increment
S1.1.1 Increment
7
7
6
8
6
5
5
5
5
4
•1
4
4
4
3
3
3
3
3
3
2
2
2
2
2
2
2
1
1
1
1
1
1
1
1
MENGER'S TABLE.
increments out of three. He could secure a first increment,
to the exclusion of all competition, by paying more than seven
and less than eight shillings for it ; for a second increment it
is not to his advantage to offer more than seven shillings, which
offer is made also by B2 ; for a third increment he cannot pay
more than six shillings, whilst B2 is disposed to pay this
price for a second increment. Being thus unable to exclude
B2 from some share in A's commodity, without undue sacrifice,
he is jointly interested with B2 in paying as little as possible
for such share of A's commodity as he can obtain. If B1 and
B2 were to offer less than six shillings for each increment of
A's commodity, B3 would enter into competition with them, he
being disposed to pay six shillings for a first increment.
Hence the price of the three increments must come to be
over six shillings ; but it will not exceed seven, because any
one of the three increments may be treated as the third,1 and
1 Jcvons formulates this proposition as a law by itself, called the law of
indifference. It is as follows : In an open market, at a given moment, there cannot
CHAP, ii DETERMINATION OF INTERCHANGE RATE 151
if A wanted a larger price for any one of them, he could get
it only by withdrawing such increment from the market. The
three increments are therefore distributed between B1 and B2
in such a way, that B1 receives two and B2 receives one ; and
all are paid for at the rate of between six and seven shillings,
those being the limits within which the price is arbitrary.
If A, instead of offering the three increments in the
market, at the same time, were to offer them one by one,
waiting for the first to be sold before he offered the second,
and so on, he would obtain for the first, which would go to
B1, a price ranging between seven and eight shillings ; the
second increment would fetch only from six to seven shillings,
and would fall to B1 or B2, according to anti-economic criteria ;
and the third likewise would only fetch between six and seven
shillings, and would be acquired by that one of the two
purchasers who had not obtained the second.1
If A were to put on the market six portions of his com-
modity, B1 would receive three, B2 two, and B3 one ; and the
price of each portion would come to be between five and six
shillings, i.e. it would be determined by the price that the pur-
chaser is disposed to pay for whom the final degree of utility
of a portion is least, or in other words, who receives the last
disposable portion.
What has been said of B1, B2, etc., may be said equally of
the social groups of consumers represented by them. Let us
now set forth the conclusions that follow from the above
reasoning.
I. In the first place, as regards the question, What
rate of interchange will result from the conflict of egoistic
forces in any given case ? — it is easy to see graphically that
this ratio is determined by the ordinate denoting the final
degree of utility of the last portion received by any purchaser
(whilst the abscissa denotes the quantity of commodity received
by each one), or by the ordinate denoting the final degree of
utility for the purchaser who receives the last portion, or the
least quantity.
be two prices for tlie same quantity of a commodity of uniform quality. Jevons,
op. tit. p. 99. This law is a deduction from the hedonic postulate and from the
premiss of the existence of competition.
1 See post, end of this chapter, § 2.
152
THE THEORY OF VALUE
PART II
In diagram XXXIV. let the straight line AB he the curve
of the degrees of utility of successive increments of a commodity
for B1, which were indicated above by numerical indices and
small squares ; and let these be conceived of as mere points.
Similarly let SO be the curve for B2, TN for B3, and so
on. Let point A be where index 8 was before, the points
P and S where the indices 7
were, and Q and T where
the two sixes were in the
Mengerian table.
The price of three por-
tions of A commodity ap-
portioned between B1 and B2
proved to be, in the fore-
going numerical example,
between six and seven shil-
lings; now, graphically, these
prices are denoted by PL
L M N
DIAGRAM XXXIV.
C
B or SI. But what are these
ordinates if not, PL the final
degree of utility of the second and last increment of A com-
modity received by B1, and SI the final degree of utility of
the only and therefore last portion received by B2 ?
The price of six portions of A commodity distributed
among B1, B2, and B3, in the proportions of three increments
for the first, two for the second, and one for the third, proved
to be, in the former example, between five and six shillings, i.e.
it is expressed graphically by the ordinates QM and TI. But
QM is the final degree of utility of the third increment for
B1, i.e. the last received by him, and TI is the final degree of
utility of the first and last portion received by B3.
Consequently the rate of interchange is given by the final
degree of utility of the last portion obtained by each pur-
chaser, and the mass of commodity obtained by each purchaser
at that price, is measured by the abscissa, and coincides with
the final degree of utility.
It may seem that the abscissa registers only two in-
crements of A commodity in the first case, instead of three,
and three in the second instead of six ; but it is obvious that,
only in so far as successive increments of the same commodity
CHAP, ii DETERMINATION OF INTERCHANGE RATE 153
are given to the same person, does Gossen's law of the decrease
of the final degrees of utility become operative. In fact, if
B1 were the only purchaser, and received all the six portions
of the last example, the price would dwindle to the ordinate
drawn through N to where it intersects AB. For the rest, the
six portions are to be found in the diagram ; only they must
be read thus : Portions I + L + M for B1 ; Portions I + L for
B2 ; and Portion I for B3.
II. Moreover, still with reference to the rate of inter-
change, from the matters already expounded may be deduced
a fundamental law, which we shall call the law of Augustin
Cournot,1 according to which, given the quantity of a commodity
that a monopolist desires to dispose, of, the price at which he
can do so is not arbitrary ; and vice versa, if the monopolist
fixes the price at which he desires to sell each portion of
his commodity, the quantity he will succeed in selling is not
arbitrary. To put it more briefly, the price is a function of
the quantity sold, and the quantity that can be sold is a
function of the price. The monopolist may treat as an
arbitrary or as an independent variable, either the price or the
quantity to.be sold; but either the quantity sold or else the
price is a dependent variable.
This relation between price and quantity of commodity sold
or to be sold, arises from the fact that in every market there
exists a determinate scale of the degrees of utility of the various
increments of the commodity in question for each individual
purchaser, i.e. there exists a law of demand. From Monger's
example it appeared that, the greater were the quantities of
commodity offered by the monopolist, the lower was the price
of each unit of commodity, and the larger was the number of
purchasers who obtained a proportionate part of the stock ; and
1 Cournot, loco cit. This law is erroneously called by some the laiv of out-
lets, which name must be reserved for the economic phenomenon to which it
was appropriated by J. B. Say, and which signifies that each new product, i.e.
every commodity freshly produced, is an outlet for those existing previously.
J. B. Say, Traitt, livre i. chap. xv. p. 138, ed. Guillaumin, Collec. prin. econ.,
tome x. J. B. Say, however, knew the law that regulates the relation between
price and quantity sold, and even expressed this relation graphically. Cours
Complet, vol. i. part iii. ch. iv. p. 360, ed. Guillaumin, tome xi. of the collec-
tion. See also John Prince Smith, Gesammelte Schriften, Band I. Zur
Physiologic des Verkehrs ; Der Markt, pp. 4-7 (1863), Berlin, Herbig, 1877 ;
also Menger, pp. 191-193.
154 THE THEORY OF VALUE PART n
the reason and measure of this phenomenon were likewise
made apparent, inasmuch as each determinate mass of com-
modity that is for sale will not be obtained by each consumer,
save at prices predetermined by the comparative degrees of
final utility of the quantity of commodity that each one
receives, and of the quantity of the thing that he must give in
exchange. As, however, we have already deduced from the
foregoing observations the theorem, that the value of a mass
of commodity is determined by its final degree of utility for
the purchaser, we may present Cournot's theorem as a simple
corollary of that law, since the final degree of utility of a
mass of commodity is in its turn determined by the quantity
of the latter, given the scale of intensity of the want to
which it corresponds.1
It is further equally easy to perceive that if the price is
predetermined, the quantity that can be sold is no longer
arbitrary. If the price were fixed by the monopolist at
a point above the degree of utility a portion possesses for
the purchaser for whom its utility is greatest, the quantity
sold would be nil, owing to the absence of the fundamental
condition of every exchange.2 If the monopolist were to fix
the price of each portion at a point between the final degree
of utility of a portion for the purchaser for whom its utility is
greatest, and the corresponding degree of such a portion for
the purchaser for whom its utility is next in order of
magnitude, he could only exchange a portion with the first
purchaser ; for with regard to the second, the fundamental con-
dition of every exchange would again not be realised. If the
monopolist were to fix the price of each portion at a level
between the final degree of utility of a portion for the second
purchaser and the final degree of such a portion for the pur-
chaser for whom its utility is next in order of magnitude, he
can only sell three portions, viz. two to the first purchaser,
and one to the second ; because with regard to the third pur-
chaser the essential condition for the realisation of every
exchange is wanting. The same reasoning applies to subse-
quent purchasers.
III. In the third place, from the preceding diagram XXXIV.
1 See part i. chap. iii. § 2, and chap. iv. § 3.
2 See last chapter, § 3.
CHAP, ii DETERMINATION OF INTERCHANGE RATE 155
we may easily ascertain the gross proceeds of the sales effected
by the monopolist, or, yet again, we may measure the total
utility gained by each purchaser from the transactions effected.
In fact, if six portions of a commodity are sold at the price
QM, it is clear that B1, who was disposed to pay AI for a first
portion, PL for a second, and QM for a third, but who only
paid for each of the three portions an equivalent of the degree
of utility of the third, and for whom the total utility of the
three portions is measured by the area enclosed by APQMLI,
has gained on the exchange a net utility equal to the area of
the figure enclosed by APQTS, i.e. equal to the aforementioned
area minus the area enclosed by TQMI.
The same reasoning applies to B2 and B3. This introduces
us to Dupuit's theorem, according to which : In exchanges,
each purchaser increases the total utility at his disposal, in the
measure obtained by subtracting from the sum of the prices he
would be disposed to pay for each successive increment of the
quantity purchased by him, the price of the last increment
multiplied by the number of increments purchased}
1 Ex. gr. for B1 the first portion had in Menger's example a degree of utility
equal to eight shillings, the second seven, the third six ; hence B1 would have
been disposed to pay 8 + 7 + 6 — 21. This is the total utility for him of the
three portions. Instead, he paid between five and six shillings for each of
the three portions, i.e. between fifteen and eighteen shillings in all. His
profit is therefore between 21-18 and 21-15, i.e. between three and six
shillings. A. Marshall, ubi supra, chap. ii. p. 21. I may further remark that
the term "consumer's rent," which at first sight may seem less appropriate
than the alternative "residual rent," not only because it is less elegant, but
also because it does not at once reveal the nature of the rent in question, or in
other words, because it seems less genetic than the other, is instead the better
term, and the one that should be universally adopted. In fact, the reader who
is already acquainted with economics will at once recognise the analogy of this
rent with the Ricardian rent, and he will further perceive that Ricardo's law
of rent is only a special case of the general law of rent. Further, the con-
sumer's rent is the one to be considered in all questions that relate to the
effects of taxes of all kinds ; i.e. it is the basis of more than half the financial
theorems that we as yet know how to formulate and demonstrate. Now, also
in this respect, the term "consumer's rent" is much more significant than the
alternative term. See J. Dupuit, ubi supra. The reason why it is necessary to
treat the marginal utility of money as constant, if it is desired that this method
of estimating consumer's rent should be accurate, is explained in Pareto's Cours
d' economic politique, Lausanne, 1896, § 83. In strictness, we should estimate
the variations of total utility, rather than the variations of the consumer's rent.
"Walras was the first to point out the difference between curves of utility and
curves of price, or demand.
156 THE THEORY OF VALUE PART n
The total utility thus gained we have already termed
elsewhere (part i. chap. iv. § 3) residual utility, or as
Mr. Marshall prefers to call it, consumer's rent.
As regards the monopolist, his gross proceeds are arrived
at by multiplying the number of increments sold by the price
at which he sold them, i.e. in the case of six increments being
sold, the proceeds are QM(3I+ 2L+1M).
We may easily obtain a graphic expression of the gross
proceeds realisable by the monopolist at each individual price,
and hence the indication of the price at which his proceeds
are maximised.
For this purpose we have only to dispose on the axis of
the abscissae, OX, the series of prices, and on the axis of the
ordinates, OY, the quantities sold at each price, on the hypo-
thesis of a determinate scale of final degrees of utility, i.e.
given a law of demand. Evidently, at a price equal to
zero at O (see diagram XXXV.), the sales will be maximised.
On the other hand, at a price greater than the final degree
of utility of a portion of commodity for the purchaser for
whom its utility is greatest, i.e* at B, the sales will be
zero. Therefore the curve that denotes sales as a function of
prices, will be negative throughout the whole of its course,
commencing with a maximum ordinate, AO, and ending with
a minimum ordinate at B. Now if we multiply each price
by the corresponding quantity sold, i.e. each ordinate by the
abscissa to which it belongs (ex. gr. AO by the abscissa zero ;
mn by On ; pq by Oq ; rs by Os ; the ordinate zero B by
OB),1 we shall have a series of data showing the gross pro-
ceeds of the monopolist at each of the respective prices ; which
proceeds, starting from zero, rise to a maximum point, and
again decline to zero ; and if denoted by means of ordinates
on the same abscissa, OB, at the points that mark the prices
to which they correspond, give us the curve of the gross
proceeds, OcdEB.2 This curve teaches us that the mono-
polist, acting as a homo aconomicus, will not determine
1 The area given by the ordinates multiplied by the abscissae is also the
offer of the other party. Walras, op. cit. p. 80.
2 J. de la Gournerie, £tudes, etc., sur V exploitation des chemins dc for,
Paris, Gauthier-Villars, 1880, partie iv. pp. 125-129 ; E. Cheysson, La statis-
tique gtometrique, mtthode pour la solution des probUmes commerciaux et indus-
triels, p. 12, Paris, 1887.
CHAP, ii DETERMINATION OF INTERCHANGE RATE 157
arbitrarily the price at which he desires to sell the mass at
his disposal, but will fix on such a price as, abstracting from
the cost, will give him the maximum sale. If, however, he
must take the cost into consideration, it will be easy for him
O n q s
DIAGRAM XXXV.
to determine by the same method the price that will give him
the maximum net proceeds.1
Let us now address ourselves to the questions relating to
the distribution among the various competitors of the mass
sold by the monopolist. From the consideration of Monger's
example, as also from the diagram representing it graphically,
1 Let the monopolist know that at a price x (measured on the abscissa) he
can sell a quantity y (measured on the ordinate), and let z be the cost of each
metrical unit of commodity for the quantity y ; evidently he will have to
arrange so that xy - yz will be a maximum.
158
THE THEORY OF VALUE
PART II
it is apparent at a glance that the distribution of the mass sold
is always effected in such a manner that all the purchasers,
i.e. all the competitors who succeed in purchasing, attribute on
their distinct hedonic scales an equal proportionate importance
to the final degree of utility of the last increment of com-
modity received by each of them ; and that for all of them,
i.e. for all the successful competitors, the final degree of utility
of the last increment of commodity received is greater than
it would be for all the competitors who did not succeed in
purchasing. This means that the commodity is distributed
B
DIAGRAM XXX7I.
among those for whom the difference in the comparative
degrees of final utility is relatively a maximum.1
If we imagine a table perforated by tubes of equal diameter,
but of various lengths, proportionate to the scale of degrees
of utility of the competitors, and that each tube communi-
cates at its extremity with the one next to it in length, a
quantity of water poured on to the table will be distributed
among the various tubes precisely in the same manner as
the monopolist's commodity among the various competitors.
This will be obvious if we compare diagram XXXVI. with
1 This proposition, as we have already observed in a note to the last chapter,
is the Ricardian theorem, in accordance with which, one nation cannot exclude
another from the market of a third, unless the difference in its comparative
costs is greater than in the case of the other. This may be so, not only when its
work is more efficient in the production of the commodity exported, but even
if it be less efficient in the direct production of the imported commodity.
See chap. iii. §\2.
CHAP, ii DETERMINATION OF INTERCHANGE RATE 159
Menger's table, or with diagram XXXIV., of which it is only
an inverted replica.
Moreover it is evident that all those are purchasers, for
whom a portion of the monopolist's commodity, at the price
fixed by himself, possesses a final degree of utility greater than
the price asked.1
Having expounded the theory of the rate of interchange,
and that of the distribution of the mass of commodity sold, in
the case of a monopoly, with reference to a concrete example,
we must now observe, that the hypothesis of maximum sim-
plicity we made, respecting the scale of degrees of utility a
commodity possesses for the various competitors, is altogether
accessory or insignificant, as regards the correctness of the
theorems enunciated. In fact, for Menger's table, in which
the degrees of utility of successive increments of a commodity
decrease uniformly for all the competitors, and in decreasing
arithmetical progression for each, we may substitute a much
more complex diagram of curves of degrees of utility inter-
secting each other in the most varied manner ; 2 but the same
reasoning will apply to them, leading up to the same theorems.
§ 2. Determination of the Rate of Interchange of a Commodity
exchanged under Conditions of Free Competition, and of the
Distribution of the Mass sold among the Competitors?
Let us suppose a commodity to be offered in a market by
a series of competing vendors, A1, A2, A3, etc., and the curves
to be traced of the degrees of utility of each increment thereof
for each of the competing purchasers. If we suppose these
1 If the less wealthy purchasers do not want to be excluded from the pur-
chase of a commodity which the monopolist does not wish to divide beyond a
given limit, several of them must combine for the purchase of an entire portion
and divide it amongst themselves. Let there be ex. gr. 250 bidders at an
auction of loaves. The monopolist has only 230 loaves, and will not cut any of
them up. Let him fix the price at twopence, and find at this price 220 pur-
chasers. The 30 who are excluded may combine, 20 contributing, say, a half-
penny each to purchase 5 loaves, and 10 contributing one penny each to pur-
chase other 5 loaves. Thus 230 loaves will be distributed among 250 com-
petitors of various degrees of solvency. — Donisthorpe.
2 These curves obey only one law : their direction must be NEGATIVE. See
following diagram XXXVII.
3 Cournot, ubi supra, chap vii. pp. 116-122, and chap. viii. pp. 122-128.
Menger, ubi supra, pp. 203-205.
160 THE THEORY OF VALUE PART n
curves to possess the simplicity of gradation and order attri-
buted to them in Menger's table, it is at once apparent that
the price for which a given mass of commodity is sold does
not depend in the least on the number of vendors, but ex-
clusively on the quantity of commodity offered for sale. In
fact, if two competing vendors, A1 and A2, offer only two por-
tions of commodity, these can only be purchased by B1, who is
disposed to pay a price that no other competing purchaser can
reach, viz. seven shillings for each portion. At this price he
makes no profit on the second portion, but he does on the
first, which possesses for him a degree of utility equal to eight.
The price for the two portions will be the same, in consequence
of Jevons's law of indifference. If the two vendors offer three
portions, B1 will take two, and B2 will take one, at a price
ranging between six and seven shillings. If A1 and A2 offer
six portions, B1 will take three, B2 two, and B1 one, and all
the six portions will be sold at from five to six shillings, those
being the limits within which the price is arbitrary. As a
general proposition, let the series of degrees of utility of the
vendor's commodity be given, for B1 by the curve blc, for B2 by
the curve 62c, and so on for all the competing purchasers ; and
let there be offered by a number of independent (i.e. not associ-
ated) vendors, thirteen portions and a quarter of the com-
modity in question ; then these portions will be distributed in
the following manner (see diagram XXXVII.) : —
B1 will buy six and a half portions, i.e. the mass Op ;
B2 will buy two and a half portions, i.e. the mass Om ;
B3 will buy three and a quarter portions, i.e. the mass On ;
B4 will buy only one portion, i.e. the mass 0.
The price will be for each purchaser equal to the final
degree of utility of the last portion received by him, and equal
to the price paid by every other purchaser. It is indicated
by the horizontal line passing through 64.
Just as these two theorems, so too every other that has
been expounded in the theory of monopoly, will be equally
true in the event of bilateral competition.1 It must, above all,
1 It is clear that the most complex form of the hypothesis, such as that
of bilateral competition, comprises in its solution the simpler ones already
explained, and not vice versd. Every complex case comprises simpler ones, in the
sense that it can be reduced to the latter, by giving a value equal to zero, or to a
CHAP, ii DETERMINATION OF INTERCHANGE RATE 161
be observed, that even in this case, a portion of the available
commodity is only obtained by those for whom the difference
in the comparative degrees of final utility is relatively a maxi-
mum.1 But if, both in the case of monopoly and in that of
free competition, the quantity of commodity actually offered
for sale determines the price at which it will be sold, and if
the price fixed by the vendors determines the quantity of
U in n p c
DIAGRAM XXXVII.
commodity that can be sold, it is clear that the difference (if
any) between monopoly and free competition can only consist
in this, that it may be to the monopolist's interest to fix on
different prices, or different quantities of commodity, from what
the competing vendors' interest would lead them to fix, in
view of the gross or net proceeds accruing from the exchange.
And so it is in fact ; 2 for in § 1 of this chapter we have
seen (diagram XXXV.), that the total gross proceeds the
unit, to a larger or smaller number of the conditions which constitute it, and
which have no parallel in the simpler cases.
1 Launhardt, ubi supra, § 8, pp. 30-35. Here as in Marshall, Economics oj
Industry, book ii. chap. i. § 6, p. 70, we are cautioned against the mistake of inferring
from such distribution, that it coincides necessarily with that which realises the
maximum of general happiness, i.e. the largest sum of happiness of which a
group of individuals are capable.
2 N. "W. Senior, Principles of Political Economy, Distribution of Wealth,
Monopolies, p. 592. Menger, ubi supra.
M
162
THE THEORY OF VALUE
PART II
monopolist can obtain by selling increasing quantities of a
commodity, do not increase with the increase of the quantity
sold, but are augmented only up to a maximum limit, after
which they go on decreasing to zero ; and that, because the
prices per unit decrease in some ratio with the increase of the
quantity sold. Suppose, for example, that the monopolist, by
selling 100 units of his commodity, obtains only one shilling
for each unit ; or that by asking one shilling for each unit of
commodity, he only succeeds in selling one hundred, and
suppose that at the price of two shillings he sells ninety, or
that by selling ninety, he obtains two shillings for each unit ;
then if we continue to work out this hypothesis as regards
increased prices and diminished quantities, we shall have a
scale of prices, quantities sold, and gross proceeds constituted
in the following manner : —
Prices.
Quantities.
Price per Quantity
= Gross proceeds.
1
100
100
2
90
180
3
80
240
4
70
280
5
60
300
6
50
300
7
40
280
8
30
240
9
20
180
10
10
100
Now if the monopolist 1 has 100 units of his commodity,
it is not to his interest to sell them all, because he gains more
by selling only ninety ; indeed, he will not even want to sell
this quantity, because the gross proceeds are larger if he sells
eighty. If we pursue this reasoning, it is easy to see that it
is not to his interest to sell fewer than fifty, nor more than
sixty, portions, as he thereby realises the maximum gross profit
of 300 shillings. And if he is fixing the price of his goods,
he will do so neither at ten, nor nine, nor eight shillings ; nor
1 We still abstract from the infjuence that the cost may have on the gross
proceeds.
CHAP, ii DETERMINATION OF INTERCHANGE RATE 163
yet at one, two, nor three shillings, but either at five or six
shillings, because these prices mark the point at which the
sales yield the maximum gross returns.
Hence whenever the quantity of commodity at his disposal
exceeds that on which he realises the maximum gross profits,
it will be to his interest to destroy part thereof, or otherwise
to withdraw it effectually from the market ; and above all not
to produce it. Or at all events it will be to his interest to offer
his commodity in successive portions, in order that he may
gradually obtain the benefit of the highest final degrees of
utility it presents for the series of purchasers.1 If, on the
other hand, the monopolist prefers to determine the price, he
will first select the higher prices, diminishing them only as he
perceives that he thereby procures a larger gross profit. On
the contrary, in the case of competition between vendors, it
will never be to the interest of any one of them to withhold
a part of his stock, or to destroy it, or to limit the amount of
his produce ; because the increase of price he would thereby
occasion would certainly benefit his rivals, who would increase
their production. If this should not be possible, the case
should be considered as one of monopoly. Moreover, it will be
impossible to raise the market prices by the offer of successive
portions, because, as each vendor will want to do so, practically
the whole disposable mass will be offered at each moment.
Finally, as regards the determination of the price of each unit
of commodity, each competitor will have, from the first, to quote
the minimum that admits of a profit, in order to ensure the
clearance of the whole disposable quantity, in his hands ; and
only after having noted the ready sale of this quantity, will he
venture to raise the prices, until warned by the opposite
phenomenon that he has reached the point that yields the
maximum gross profit
1 See last note, § 4, chap. i. part ii. respecting the difference between the English
and the Dutch systems of auction.
CHAPTER III
THE LAW OF DEMAND AND SUPPLY
§ 1. Of the Remote Factors that determine the Curve of
Degrees of Utility and the Disposable Quantity of a
Commodity.
FROM the matters set forth in the last chapter it was made
plain, that the price at which each portion of any commodity
can be sold is fully determined : (a) by the scale of degrees of
utility existing at a given time and place1 for successive
portions of that commodity; and (b) by the quantity of such
commodity that is disposable 2 at that time and place ; in
other words, we have seen that these two factors are the
proximate and sufficient determining causes of the price. It
has been further shown that these same factors determine the
distribution of the commodity among the purchasers. But
even the quantity of the commodity that may be sold in a
market has ceased to be arbitrary ; and we have seen that,
given the price at which it is sold and the scale of degrees of
utility, we have the proximate and sufficient causes that
determine it ; and that, in this case also, its distribution among
1 "Place" is not to be understood topographically, but as a market in the
vide sense attached to this term by economists. By market is meant the fact of
a group of persons being in business relations with each other, irrespective of
where they may reside. Tims the bankers of the principal cities of Europe
and of the United States of America may at a given moment form a single
market.
2 The quantity disposable, in accordance with what has been set forth in
the first part, may comprise future commodities, e.g. next year's harvest,
or an industrial product not yet manufactured, may be dealt in, in the
market.
CHAP, in THE LA W OF DEMAND AND SUPPLY 165
the consumers1 is predetermined, being dependent on those
same causes.
Now, it is this complex of causal relations that has always,
and particularly since the time of J. Stuart Mill,2 been meant
by the proposition, that prices depend, on the relation between
supply and demand. In fact, the scale of final degrees of
utility for successive portions of a commodity has been termed
the demand, and the quantity disposable, the supply of such
commodity. Hence we say, that if the demand increases, prices,
cceteris paribus, rise ; and that if the demand decreases, prices
fall. This means that if the scale of degrees of utility of
successive increments of a commodity changes, so that the
degree of utility of each increment of commodity for the con-
sumers increases, or in other words, that the difference in the
comparative degrees of utility for them of the commodity and of
the price is increased, they must and will pay a larger price
than before for equal quantities. That this is so, admits of no
doubt, in view of what has been set forth above. In the same
way we say, that if the scale of degrees of utility remains
unaltered, but the disposable quantity of commodity increases,
the price falls; and vice versa if the supply increases, the
demand remaining stationary, the price falls; whilst if the
supply diminishes, the price rises.
The variation prices undergo, if either the scale of degrees
of utility, i.e. the law of demand (see ante, part ii. chap. ii. § 1,
note), or the supply be modified, is indeed in a direct ratio to
the demand, and an inverse ratio to the supply; but it is
impossible as a general proposition to determine either ratio
according to numerical proportions. For each commodity is
governed by its own law of demand, and this law varies from
one moment to another ; and each commodity has its own laws
of supply, which likewise vary from one moment to another.
1 Since therefore the price, or the quantity of commodity sold, its distribution,
and the secondary phenomena considered in the preceding chapter in connection
therewith, are the effects of two CONDITIONS OF FACT, viz. of the curve of final degrees
of utility, and of the price or disposable quantity of commodity, economists say
that the price, or the quantity sold, and the distribution of such quantity, are
natural phenomena, or phenomena caused by natural laws, i.e. they are never
arbitrary, or artificially variable, unless the artifice affects the nature of the said
conditions of fact.
2 J. Stuart Mill, Principles of Political Economy, Longmans, People's ed.
1883, book iii. chap. ii. § 4, p. 271.
166 THE THEORY OF VALUE PART n
It is also said that if the price rises, the demand is restricted,
and that if the price falls, the demand is enlarged or extended.
This too is substantially true ; but having regard to the last
proposition, it is not free of ambiguity, for it signifies that the
LAW OF DEMAND, i.e. the scale of degrees of utility of a commodity,
KEMAINING STATIONARY, a reduction in price renders the com-
modity accessible to more consumers, whilst a rise renders it
accessible to fewer ; in other words, the consumption, to speak
accurately, or figuratively the demand, is extended or restricted ;
but it neither rises nor falls.
Lastly, it is said that prices attain the level at which
demand and supply are equated. In this case again, an in-
variable law of demand, i.e. a scale of degrees of utility, is pre-
supposed ; and what is meant is, that for every quantity of
commodity that is offered, there is a price at which the quantity
demanded, i.e. consumed by the consumers, is precisely equal.
This is a simple corollary of the preceding proposition, and is
only defective in this respect, that it ignores the case of there
being various prices at which the equation between supply and
demand is realised.
Deferring at present a minute investigation of the laws of
demand and supply, and by way of clearing the ground for
this investigation, it will be well to examine the more remote
causes of those laws, i.e. the causes owing to which the curve
of final degrees of utility1 follows one direction rather than
another, and the disposable quantity of a commodity comes to
be what it is.
As regards the final degree of utility of a commodity, we
know that it is determined by the place of the corresponding
want in the scale of intensity of an individual's numerous
coexistent wants (part i. chap. iii. § 2 ; and chap. iv. § 3), and
by the quantity of that commodity already possessed by such
1 Of the causes that determine whether the curves are many or few nothing
of a genera] character can be predicated. Every commodity appears to us to
have special technical properties of its own, and these too are for the most
part imperfectly known. The subject is also vague, because the doctrine of
the variety of wants and of the degrees of absolute intensity of wants is
vague. Respecting some commodities there are excellent monographs, those
on the precious metals being most numerous. See also Jevons's Coal Ques-
tion, and Cairnes's Leading Principles, 2nd ed. 1883, Macmillan, part i. chap,
ii. § 6, p. 36.
CHAP, in THE LA W OF DEMAND AND SUPPLY 167
individual. These two conditions of fact determine, on the
one hand as regards the purchaser, the final degree of utility
of the commodity he desires and that is in the vendor's
possession, and the final degree of utility of the commodity he
will eventually give in exchange, and that is in his possession,
i.e. the price ; and on the other hand, as regards the vendor,
the final degree of utility of the commodity he desires, viz.
the price, and that of the commodity he is disposed to give in
exchange, i.e. the subject-matter of the sale.
This doctrine however is complicated by the fact, that the
final degree of utility of a commodity may be immediately de-
termined by that of another commodity.
These cases may be grouped under three headings : —
1st. If we cease to have a commodity that was in our posses-
sion,— or a portion of a determinate quantity of commodity —
and such commodity or portion thereof may be replaced by our
labour, we must differentiate the case of the pain or cost (see
part i. chap. ii. § 4) of reproduction being greater than the
pain of doing without the commodity, from the case in which
it is less. If the cost of reproduction is greater, a hedonist
will not incur it, preferring to endure the lesser pain caused by
the total or partial non-satisfaction of a want, owing to the
loss of the commodity capable of satisfying it ; but if the cost
of reproduction is less, a hedonist will prefer to incur it. Now
on this last hypothesis, the loss of the commodity in question
has not occasioned him as much pain as he would have had
to suffer had it not been susceptible of reproduction, but only
the lesser pain involved in the labour of reproduction. Hence
the final degree of utility of the commodity, in the several
cases of its being acquired, dispensed with, or lost, is no longer
its own intrinsic degree, but that of another commodity pos-
sessing a lower degree of utility ; or to use Ferrara's words, it
is equal to the cost of the physical reproduction of the com-
modity. The law of exchange remains what it was ; only
the final degree of utility, which is one of its factors, attains
a level it would not otherwise reach.
2nd. If we cease to have a commodity that was in our
possession — or a portion of a determinate quantity of com-
modity— and such commodity, or portion thereof, is either not
susceptible of physical reproduction, or is so only at a cost that
168 THE THEORY OF VALUE PART n
represents a final degree of negative utility greater than the
final degree of positive utility of the commodity we have lost, it
may be that we can substitute for it — ex. gr., by means of
labour — another commodity possessing a final degree of utility
greater than its cost (i.e. than the final degree of negative
utility of the requisite labour). In this case the loss of the
commodity has not entailed on us all the pain its deprivation
would otherwise involve ; but only a differential pain, always
less, and often much less, than would otherwise be the case.
In fact we have forfeited the entire utility of the commodity
we have lost, and in addition we have suffered the pain entailed
by the cost of production of its substitute ; but we have
acquired the utility of this substitute, which according to our
hypothesis is greater than its cost of production, and which
therefore constitutes a partial set-off against the pain caused us
by the loss of the first commodity. Hence the final degree of
utility of this commodity comes to be, not the whole of its own
degree, but its own degree minus a part of the final degree
of another, in consequence, as Ferrara says, of the cost of re-
production by substitution. We must again observe that this
condition of things in no way alters the law of exchange, as
we are dealing with factors that determine the final degree of
utility of commodities, which degree is considered generically
with reference to this law.
3rd. All riches, i.e. all commodities having an exchange
value, MAY have a final degree of utility that mediately
is not their own. If any such commodity, or a portion
thereof, fails us, we can always, by the sacrifice of another
commodity, termed price, obtain a duplicate of it. Hence the
loss of a commodity having an exchange value may entail on
us, not the non-satisfaction of the corresponding want, or
degree of want, but the non-satisfaction of that other want
which the commodity we give to obtain a duplicate of the first
commodity would have satisfied. Now, one or other of these
two conditions must be realised with respect to a commodity
having an exchange value : either it possesses for us a final
degree of utility less than that of its price, in which case the
hedonist will not repurchase it,1 and its loss will be measured
exactly by its final degree of utility ; or else it has a final
1 In equilibrium this case is impossible, because a hedonist would have sold it.
CHAP, in THE LA W OF DEMAND AND SUPPLY 169
degree of utility greater than that of its price, and we have
consequently the same case as we had before, when considering
the cost of physical reproduction ; that is to say, the loss of
the said commodity will only entail on us a smaller, frequently
a much smaller, sacrifice, equivalent to the final degree of
utility of the commodity which is its price, or in Ferrara's
words, to its cost of reproduction by exchange. It is obvious
however that the existence of a cost of reproduction by ex-
change, cannot affect the final degree of utility of a commodity
in a market, unless there exists another independent market in
which the reproduction by means of exchange at a lesser price
may ~be effected ; and that therefore this possibility or condition
of things cannot be a determining factor of the final degrees of
utility of commodities in the market IN GENERAL, i.e. on the hypo-
thesis of one universal market}
Apart from these three cases, in which the final degree of
utility of a commodity is not its own, but that of another
commodity — of which three, however, only the first two are
important as regards the theory of exchange, — the factors that
can affect it are those we have discussed already (part i. chap,
iv. §3), and it only remains for us to speak of the causes that
determine the greater or lesser availability of a given kind
of riches.
These causes, on which the available quantity of a com-
modity depends, are divided into two categories, viz. : on the one
hand, causes that are in no way subject to the human will, — and
that consist of invariable conditions of fact of the environ-
ment,2— and on the other, causes that are at least partially sub-
ject to the human will, and that may all be comprised in the
conception of the cost of production of things.
This division is not based on any diversity in the opera-
tion of the causes according to the category to which they
1 The error so frequently committed of reckoning as a factor of the rates
of interchange in general, the cost of reproduction by means of exchange in
another market, is admirably exposed and criticised by Bbhm-Bawerk, ubi supra,
p. 516. This work is however devoid, down to its minutest details, of all
originality. On cost of reproduction, see : Maiorana Senior and G. Maiorana,
Teoria del valore ; Martello, Appendice alia moneta, p. 533 ; G. Rossi, La
niatematica applicata alia teoria della ricchczza sociale ; Loria, H valore negli
economisti italiani ; Carey, Bill. delV Econ., serie i. vol. xiii. c. ii. pp. 336-
343 ; Ferrara, Introduzione, vol. v. serie i. p. Ivi. ; vol. xi. pp. Ixv.-lxviii.
2 For instance, the comparative abundance of gold and silver strata.
170 THE THEORY OF VALUE PART n
respectively belong ; l but on the fact that when they belong
to the former, nothing can be predicated of them that does not
pertain to some purely technical branch of science, whilst if they
belong to the latter, they afford ample scope for observations
pertaining to the theory of value.
In fact we recently found the cost of production among the
causes that sometimes determine the final degree of utility of
commodities ; and if we find it likewise amongst those that
affect the available quantity of commodity, it is evident that
this phenomenon possesses singular importance, and deserves
to be discussed ab ovo.
§ 2. Of the Identity of the Cost of Production and Final Degree
of Utility of Commodities and of some of the Principal
Deductions from this Theorem.
Most riches are in a certain sense the fruit of human
activity. Men, it is true, cannot produce even the least of
things ; and matter and the properties of matter, or forces,
have ever been, and ever will be, an invariable cosmological
fact. But men can, according to the measure of their tech-
nical knowledge, produce utilities, that is, they so dispose
matter and the forces that operate on matter, as to satisfy
their wants. Men move things into such positions that their
natural properties yield results subservient to human wants.
And this movement which men impart to things, in order
to render them useful, is wrought ultimately by means of the
employment and expenditure of muscular force ; 2 which is
accompanied by painful sensations (see part i. chap. iv. § 10).
Now, the original and precise meaning of the term cost of
production, is the sacrifice or pain submitted to in order to
1 " It is true that wherever there is utility, the addition of labour necessary
to production constitutes value, because, the supply of labour being limited, it
follows that the object, to the supply of which it is necessary, is by that very
necessity limited in supply. But any other cause limiting supply is just as
efficient a cause of value in an article as the necessity of labour to its production.
And in fact, if all the commodities used by man were supplied by nature without
any intervention -whatever of human labour, but were supplied in precisely the
same quantities as they now are, there is no reason to suppose either that they
would cease to be valuable or would exchange in any other than their pn - nt
proportions." — N. W. Senior, Principles of Political Economy, p. 24.
2 R. Jennings, op. cit. chap. ii. p. 105 ; Gossen, op. cit. p. 35.
CHAP, in THE LA W OF DEMAND AND SUPPLY 171
obtain a, commodity. The forms this sacrifice may assume are
various, ex. gr. work in its narrower sense, vigilant attention,
forethought, abstinence from some immediate enjoyment, etc. ;
but economically these forms are indifferent ; they may all be
comprised under the generic conception of labour, or cost,
or pain. 1 .
According to this meaning of the term, the cost of pro-
duction of a thing is primarily only another term for its final
degree of utility. This is easily shown to be the case. Sup-
pose the scale of intensity of a want to be given, ex. gr.
the various degrees of painfulness that may accompany the
want of food ; and let there be given a determinate quantity
of the commodity corresponding to the given want, ex. gr. a
quantity of food, say eight increments, corresponding to
eight different degrees of the want. Then according to what
has been stated (part i. chap. iv. § 3), the measure of the
utility of the eighth increment of the commodity in question
is determined, either by the pain caused by its loss to the
person who had the eight, or by the pleasure experienced by
the person who has the seven increments, if an eighth be
added to his stock. In other words, in either case, it is equal
to the hedonic quantity constituted ly the eighth degree of intensity
of the want in question, and it may be expressed indifferently in
terms of pleasure or of pain (part i. chap. iii. §2).
But moreover we already know (part i. chap. ii. § 4),
that if the loss of one increment of a commodity does not
necessarily entail on us the pain consisting in the non-satis-
faction of the corresponding degree of want, but leaves us the
option of submitting either to that pain or to another due to
the less painful non-satisfaction of some other degree of another
want, it is this second pain that is the measure of the degree of
utility of the increment in question ; because this will be the
only pain actually submitted to by a hedonist. Thus, too, if
the acquisition of an increment of commodity may be made by
submitting disjunctively to pains of varying intensity, it is still
only the least of them that is the measure of its degree of
utility. Therefore if a thing, or a portion of a homogeneous
quantity of things, ex. gr. an eighth increment of food, may
be obtained by a determinate amount of labour, say two hours'
1 J. E. Cairnes, op. tit. part i. chap. iii. § 5, p. 57.
172 THE THEORY OF VALUE PART n
work, which is less painful to us than the degree of discom-
fort we should experience by forgoing the satisfaction of the
corresponding degree of want, the two hours' work, or rather
the sacrifice it imports, will be the measure of the degree of
utility of the said increment, i.e. the cost of production will
coincide with the final degree of utility. And if one thing is
obtainable by the sacrifice of another (say of one shilling) the
want of which is less painful to us, the commodity we forgo
will be the cost or price of the other, and will coincide with its
final degree of utility.1
But if the cost of production is the final degree of utility
of commodities, — provided they be susceptible of reproduction,
and that their cost be less painful than the absence of the
satisfaction their possession affords us, — it follows necessarily
that if the commodity in question be such that it can only be
obtained ~by means of production, the cost of the last increment
produced is always its final degree of utility ; for, if it exists,
it must have been produced, and if it has been produced, the
non-satisfaction that would otherwise have ensued would have
been more painful than the cost that has been incurred.
This doctrine of the identity of the final degree of utility and
the cost of the last increment is already known to us in con-
nection with the questions discussed in the last paragraph, in
which we found that for the final degree of utility of a given
commodity we must, under determinate conditions, substitute
that of another, i.e. sometimes the cost of its physical repro-
duction, sometimes the cost of its reproduction by way of
exchange, and sometimes the cost of its reproduction by means
of a substitute.2
Having thus ascertained that the cost of production of a
commodity MAY be its final degree of utility, if it be susceptible
of reproduction ; and that such cost of production must be the
final degree of utility if the commodity is of a kind obtainable
only by production, it follows that all the theorems we have
expounded respecting the final degree of utility are applicable
1 In perfect equilibrium these cases are impossible, because the last incre-
ment of every commodity possessed has a final degree of utility standing in the
same proportion to its cost ; but, practically, equilibrium is never perfect, and
these substitutions must therefore be also considered theoretically.
2 In this last case, the reader will remember, that there is no effectual con-
stitution of final degrees of utility, but a diminution of its own original degree.
CHAP, in THE LAW OF DEMAND AND SUPPLY 173
to the cost of production.1 This constitutes a proposition of
capital importance, for it enables us to solve economic problems
indifferently, in terms of cost, or of degrees of utility, according
as is most convenient in any given case, — just as in mathematics
we may have recourse to analytic or geometric methods, — and
it enables us, in the demonstration of economic theorems, to
pass from one form of expression to the other, whenever this
transition may facilitate the comprehension of the relations of
the problem.
It may be well to translate into terms of cost of production,
and to demonstrate independently, some of the propositions
relating to the final degree of utility which we have demon-
strated above ; and this not only by way of example, but also
in view of their importance with reference to numerous
questions of applied economics.
1st. " In order that an exchange may take place between
two individuals, there must be a difference between the com-
parative degrees of final utility of the respective commodities
for each of them." 2 This theorem may thus be translated in
terms of cost : —
1 It seems to me that the identity, or at least the equivalence of final cost, i.e.
cost of the last increment of commodity at our disposal, or required by the
market, or that we wish to produce, etc., and final utility, i.e. utility of the last
increment of commodity at our disposal, or required by the market, or that we
wish to produce, etc., requires no new demonstration, since it is not even a corollary
of the Gossen-Jevons theorem of the equivalence of the ordinates of painfulness
and pleasure at the moment when a hedonist breaks off any work he is engaged
in (part i. chap. iv. § 10), but merely a PARAPHRASE of that theorem. But
whoever admits this, must recognise that the new doctrines of the final degrees
of utility are a no less unexpected than crushing demonstration of the precision,
elegance, and truth of all the theorems of the orthodox and classic economists.
2 It is important to note, that the condition that the comparative degrees of
utility, or of cost, should be in an inverse order for the two parties, is not neces-
sary. That is the case in the instance given above, and many text-books lay
down this condition as essential, but it is really superfluous, the first alone
being necessary and sufficient. Thus, let the costs be f and f = ff and if.
The rates of exchange will be the reciprocals of the fractions £f , ||. In fact,
Primus gives 54 increments of commodity A to Secundus, spending 54 x 45.
Secundus would have had to spend 48 x 54. Secundus gives 46 increments of
commodity B to Primus at a cost of 46 x 54. Therefore, Secundus gains (48 - 46)
54. Primus receives 46 increments of B, which would cost him 54 x 46, but
for which he actually pays 54 increments of A = 54x45. Therefore Primus
gains (46-45) 54. In order to make the point quite clear, I shall modify the
example in the text so as not to realise the superfluous condition. Let the
cost of production of n yards of silk be 80 for the First country, and the cost of
174 THE THEORY OF VALUE PART n
" In order that an interchange may take place between two
individuals (or between two groups of individuals constituting
close markets, i.e. groups so constituted that capital and labour
cannot migrate from the one to the other, or between two
countries) there must be a difference in the comparative cost
of production." In fact, let us consider the case of two
countries supposed to be close markets. Let the First pro-
duce a determinate quantity of silk, at a cost of 80, and a
determinate quantity of cotton at a cost of 96 ; and let
the Second produce the same quantity of silk at a cost of 120,
and the same quantity of cotton at a cost of 100.1 The First
will ask itself: Do I obtain more cotton at an equal cost, or
the same quantity of cotton at a less cost, by manufacturing it
'at home, or by manufacturing silk and exchanging it for the
other country's cotton ? And the Second will ask itself, whether
it will obtain more silk, or the same quantity of silk at a less
cost, by not producing it at home, but by producing cotton
instead, and exchanging it for the silk of the First. For both
countries there is a notable difference in the comparative cost :
for the First a difference constituted by the cost of the silk at
80 and that of the cotton at 96, i.e. sixteen units, equal to
16'6 per cent; for the Second a difference constituted by the
cost of the cotton at 100 and of the silk at 120, i.e. by twenty
units, also equal to 16'6 per cent. It is immaterial that the
m yards of cotton, 96 for the Second. On the other hand, let n yards of silk
cost the Second country 110 to produce, and m yards of cotton 120. We have
thus a difference in the comparative cost of production of the two commodities
in the two countries ; but the difference is consilient ; in both countries it costs
less to produce n yards of silk than m yards of cotton. Is this a sufficient and
necessary condition to induce an interchange ? It is. Let the First offer 95
days' labour in silk, or 1'187 n yards of silk for m cotton to Secundus. If the
exchange is accepted, the First will gain one day's labour, for each barter, as
compared with the position it would be in, if it were itself to produce cotton by
96 days' labour. The Second will also accept the proposed interchange, because
by delivering m yards of cotton, at a cost of 120 days' labour, it obtains 1'187
n yards of silk which would cost it 130*570 days to produce. In fact l?i=110
days' labour ; therefore 1 '187*= 110x1 '187 =180*570 days. The same result
is arrived at, if we reflect that the 80 days' labour in silk of the First are to the
110 days of the Second, as the 95 of the First are to the 130 '570 of the Second.
1 David Ricardo, Principles of Political Economy and Taxation, chap. vii. p. 7ii,
M'Culloch's ed. ; A. L. Perry, Political Economy, 18th ed., New York, Scribner,
1883, chap. xii. pp. 461 et seq. ; Cairnes, o}i. cit. part i. chap. iii. § 7, p. 87 ; part
iii. chap. i. pp. 297-319 ; J. S. Mill, op. cit. book iii. chap. xvii. pp. 3-17-351 and
Essay I.
CHAP, in THE LA W OF DEMAND AND SUPPL Y 175
comparative cost of both commodities is greater for the Second
country. If the two countries were not close markets, the
labour and capital of the Second might with most advantage
migrate to the First, where industry is more remunerative, i.e.
where labour is more efficient. As this is not possible, it is
evidently to the interest of loth to exchange those commodities
in the production of which the labour of each is comparatively
more efficient.
For, if the First country, by parting with as much silk
as it can produce at a cost of 80, obtains in exchange as
much cotton as it can produce at home, only at a cost of
96, it saves 16 units of cost, i.e. 16*6 per cent of the labour,
or pain, it would have to submit to, if it did not exchange ; if
the Second, by parting with as much cotton as it can produce
at a cost of 100, obtains a quantity of silk that it could not
produce at home, except by the sacrifice of 120 units of cost,
it also saves 16 '6 per cent of the labour it would submit to,
were the exchange not effected.
Therefore a difference in the comparative cost is a sufficient
condition to make an exchange advantageous as between two
close markets, whether these be individuals, or groups of
individuals ; and this, even if the absolute cost of production
in all its branches, in one of these markets, is greater than
in the other. On the other hand, without a difference in the
comparative cost, no exchange presents any advantage, for it
saves no cost.
2nd. " It is more advantageous to exchange at any ratio
between the maximum and minimum limits of the comparative
degrees of final utility, than to forgo the interchange."
This theorem is translated in terms of cost in the following
manner : —
" It is more advantageous to exchange at any ratio between
the maximum and minimum limits of the comparative costs
than to forgo the exchange." In fact, the maximum and
minimum limits of the price of the Second country's cotton,
expressed in terms of the First country's silk, are 96 and 80 ;
and the maximum and minimum limits of the price of the First
country's silk, expressed in terms of the Second country's cotton,
are 120 and 100. For if the Second were to ask for the
quantity of cotton it produces at a cost of 100, and which the
176 THE THEORY OF VALUE PART n
other could produce at a cost of 96, a higher price than 96
in silk, i.e. if it were to exact, as an equivalent for the above
quantity of cotton, such a quantity of silk as would take the
First nation 96 or more units of cost to produce, it is obvious
that the latter will prefer to forgo the exchange, and to
produce itself the cotton it requires. But if the Second
country does not demand a quantity of silk requiring 9 6 units
of cost, but any smaller quantity, costing, say, 86, 87, 88 up
to 95 units, it is clear that the First will prefer an exchange
to the direct production of the cotton it requires, thereby
saving a larger or smaller cost. The cotton it requires
however, can never cost it less than 80 units of cost, because
that is the cost of the minimum quantity of silk that, on the
most favourable assumption, is required to procure the cotton,
i.e. that is to pay for the latter. The same reasoning applies
to the Second nation. If it obtains the silk by giving the
cotton which costs it 100, it saves 20 units of cost; if it has
to give as much cotton as it can produce at a cost of 110, it
will still save 1 0 units ; if it has to give as much cotton as
it can produce at a cost of 119, it will still save one unit of
cost. But if it had to pay for the silk 121 units of cost
measured in quantities of cotton, it would be more advantageous
for it to produce the silk at home. Therefore within the limits
of the comparative costs, it is to the advantage of both countries
to barter, whatever may be the rate of interchange. One may
gain more than the other, but each gains something, whatever
the rate of interchange may be within these limits.
3rd. " The final degree of utility of the commodity that
either party gives to the other, is the price of the quantum of
commodity that either receives from the other."
This theorem is translated thus : —
" The cost of production of the commodity that either party
gives to the other is the price of the quantum of commodity
that either receives from the other."
Suffice it to observe that the cost is always the cost of the
last portion of the amount given in exchange. The demonstra-
tion of the last theorem applies equally to this one ; the
eighty units of cost of the silk are for the First country the
price of the quantum of cotton it receives in exchange.
4th. " The profits of each party to an exchange are the
CHAP, in THE LA W OF DEMAND AND SUPPLY 177
greater, the greater the difference for each between the final
degrees of utility of the commodities he respectively gives, and
receives in exchange."
This theorem is formulated as follows : —
" The profit accruing from international trade (i.e. trade
between close markets), is the greater, the greater the difference
for either nation between the cost of the wares it gives and
that of the wares it receives in exchange."
In fact, let us suppose that the First country, for which
a determinate quantity of its own silk cost 80 units, can now
produce the same quantity at a cost of 50 units, the cost of
direct production of cotton remaining in its case 96, whilst
the cost of silk remains in the case of the Second country
120, and that of cotton 100.
The rate of interchange was, before the supposed reduction
in the cost of silk, in the case of the First country, 80 in
silk as against 96 in cotton, affording a profit of 16*6 per
cent; and for the Second, 100 in cotton as against 120 in
silk, yielding a profit of 16 '6 per cent.
By the reduction of the cost of production of silk from
80 to 50, the profit the First nation obtains by exchanging
becomes enormous.1 It still gives the same quantity of silk
in exchange for the same quantity of cotton as before. But
this quantity of silk now costs it 50 instead of 80 ; so that
at a cost of 50 it procures a commodity which would cost it
96, if it were to produce it directly. The saving of cost is
therefore 46 units. The Second nation continues to earn the
same profit as before. Even were the First nation now to offer
for the same quantity as before of the Second nation's cotton,
such a quantity of silk, as before the fall in the cost of
production, would have cost it 96 units to produce, it will
only submit to an effective cost of 60 units; for the former
80 units of cost stand to the present 50 units of cost as 96
to 60.
If instead of the cost of production of silk being diminished,
in the case of the First country, the cost of the direct production
1 The rates of interchange will vary as the effect of a force we have still to
discuss : suffice it to remind those who are not new to economics, that within,
tlie limits of comparative costs, the reciprocal demand determines the rate of inter-
cJiange.
N
178 THE THEORY OF VALUE PART n
of cotton had increased, say from 96 to 98, the difference be-
tween the comparative cost would be still greater than before,
having risen from 16 to 18, and the profit arising from the
exchange would also have increased. Hence it is evident that
international trade, or trade carried on between isolated indi-
viduals or isolated groups of individuals, may become more
profitable, not only as the result of some industrial progress
whereby the cost of production is reduced, but also as the result
of some misfortune, such as the exhaustion of the soil, technical
retrogression, or racial degeneracy, whereby the maximum com-
parative cost is increased. In any case it is proved that the
gain is the greater, the greater is the difference in the com-
parative cost.
5th. " If several purchasers compete for the commodity of
a single vendor, it will be acquired by the purchaser for
whom it has a maximum comparative final degree of utility."
This theorem and the 6th : " If several vendors compete for a
single purchaser, the vendor for whom the difference in the
comparative degrees of final utility of the two commodities is
greatest will succeed in selling his commodity," being correla-
tive theorems, may be combined in the following one : —
" If several vendors (or purchasers) compete for a single
purchaser (or vendor), that vendor (or purchaser) for whom
the comparative cost is greatest will exclude his competitors
from the market."
In fact, the First country, we have supposed, is willing to
receive the cotton of the Second at a price of 80 in silk, i.e.
to give in exchange for the cotton such a quantity of silk as
costs it eighty units to produce, ex. gr. eighty days' work, or
eighty shillings of expenditure, thus gaining 16'6 per cent in
the shape of a saving of cost, or of sacrifice in the satisfaction
of its wants ; but it cannot offer a higher price to the Second
than 96 in silk, at which its profit is nil. Now let a Third
country also want cotton, and let it also produce silk at
a lower comparative cost. It will then exclude the First
from the market of the Second, if it can offer more than 9 6 in
silk for the same quantity of cotton ; for up to that price the
First country is also disposed to go, if necessary. But the
Third nation will not be able to offer more than 9 6 in silk for
the cotton, unless it is either more efficient in the production
CHAP, in THE LAW OF DEMAND AND SUPPLY 179
of silk, — so that, e.g., it can produce, at a cost of 50, a quantity
which costs the First nation 80, — or less efficient in the pro-
duction of cotton, so that, e.g., it could not produce the latter
directly for less than 98 units of cost. Therefore it is essen-
tial that the difference between its comparative costs should be
greater than the difference between those of its rival, so that it
may have either a lesser minimum limit or a greater maximum
limit than the other to its rates of interchange.1
These theorems, together with some others, constitute what
is called Eicardo's theory of foreign trade,2 or of comparative
cost. It concerns us to recognise in them the restatement of
theorems we have already ascertained in other ways, and to
note that they are susceptible of independent demonstration
in terms of cost ; cost being substantially identical with final
degree of utility.
§ 3. Of an Erroneous Meaning attributed to Cost of Production,
and of some consequent Erroneous Propositions
The conception of the cost of production, which is perfectly
simple, so long as it is considered in isolated or individual
1 The mistake is commonly made of supposing that the lower rate of wages
current in one country is the cause that enables it to export a commodity, say
iron manufactures, to another country, and to exclude the latter from a neutral
market. If the First country pays lower wages, and exports iron manufactures
to the Second, where wages are higher, it is obvious that the rate of wages has
nothing to do with the matter. For the Second country pays, say with cotton.
Now, if in this country there were a fall of wages all round, the cost of pro-
duction of iron and cotton would be reduced proportionately, and the difference
in the comparative cost would remain the same ; hence the First country would
continue to export iron to the Second, taking cotton in exchange. This
argument assumes that wages are part of the cost of production, rather than
its remuneration. But that is precisely what protectionists assume. See
Cairnes, op. cit. pp. 325, 326 ; and Symes, p. 150, Pol. EC. Of course wages
affect various productions in very different measure. A change in wages will
alter the demand for a great many elements of production, ex gr., the use of
machinery, and will have very complex effects.
2 These theorems are said to refer to international exchanges, because it is
considered that nations are, in the main, close markets, with respect to each other,
i.e. that no considerable migration of capital or labour from one to the other is
likely to occur. This is a question of fact pertaining to applied economics, which
has no interest for us. The Ricardian theorems apply to close markets, wherever
situated, and whatever they may be, i.e. whether they be nations or non-com-
peting industrial groups, or individuals.
180 THE THEORY OF VALUE PART n
economics, has been frequently obscured by those who have
attempted, at the outset, to analyse it in social economics, and
under a regime of perfect division of labour. Suppose a society
constituted as our most civilised contemporary communities,
i.e. divided into capitalists, contractors, and labourers (the
landlords being for the present left out of account), it may
seem at first sight that the cost of production of any product
consists in a determinate sum of wages and interest paid by
the person who has undertaken to produce it. In fact, a
capitalist pays workmen, i.e. spends a sum in wages, and
purchases and provides the tools, the raw material, the
workshops, and all else that is required for the manufacture of
an article. But all the wealth he purchases, in addition to
the wages he pays, has been produced before by the payment
of other wages, and the supply of other tools, raw materials,
workshops, etc., by other capitalists, whom he simply refunds,
when he purchases their products to serve as instruments of
his own production, or in other words, whose expenditure he
simply takes over. Hence, if we retrace the scale of costs
of a product, noting all the costs of the things that go to com-
pose it, or that contribute to its production, we find ultimately
the two above-mentioned most simple elements, viz. remunera-
tion of the labour expended by generations of workmen, and
remuneration of the capitalists' abstinence from immediate
consumption ; or in other words, a determinate sum of wages
and interest.
But if we adopt this definition of the cost of production,
these two propositions must follow, viz. : 1st, That the value
of all products is always determined by their cost of produc-
tion ; and 2nd, That the cost of production is the cause of the
value of commodities.
In fact, as regards the first proposition, it is mere tautology,
for it is given by the definition of the cost of production of a
product, that it is equal to the sum of the wages and profits
paid for its manufacture. But it is obvious that the price at
which the product is sold, if it be produced repeatedly, and
therefore not at a loss, is the sum that is divided into wages
and profits. Hence, whatever be the price, the sum of the
wages and profits, and the cost of production, will be the same ;
in other words value, considered, not as ratio of exchange, but
CHAP, in THE LA W OF DEMAND AND SUPPL Y 181
as price, or as purchasing power, is equal to the cost of pro-
duction understood in the same sense.1
As regards the second proposition, it is given by the genesis
of the definition, according to which the cost of production
consists of the sum of the labourers' wages and capitalists'
profits, and the person who wants a product must refund to
its makers the whole expenditure they incurred in the shape
of wages and profits ; in other words, the price or value of the
product is what it is, because the product has cost so much.
And our daily experience, considered superficially, seems to
bear out this thesis.
§ 4. That the Value of Commodities consumed in the Production
of another Commodity cannot ~be the cause of its Value.
Wiesers Law.
Pausing first to examine the doctrine according to which
valuable things are such, because they have been produced by
means of other valuable things, it is evident, at first sight,
that it cannot pretend to indicate the cause of value in general,
but at most, only the cause why a determinate thing possesses
value. For if the things that have served for the production
of the one whose value it is desired to explain, are themselves
valuable, it is clear that it is further necessary to explain how
it is that these productive commodities came to be valuable ;
and if the same reason applies to them, viz. that they are
derived from other valuable commodities, the question is only
removed further back, since it will remain to be explained how
these remoter productive commodities came to be invested
with value.
Bearing in mind some things mentioned before (part i.
chap. iv. § 5), we shall suppose a direct commodity to be
capable of being produced by means of a single instrumental
commodity. In that case, as we already know, the instru-
mental commodity has a purely reflex final degree of utility,
derived from the final degree of utility of the immediate, or
direct, commodity which can be produced by its means. If the
process of production requires a certain duration, the degree
of utility of the instrumental commodity will correspond to
1 Cairnes, op. cit. chap. iii. §§ 2, 3, pp. 45-51.
182 THE THEORY OF VALUE PART n
the final prospective degree of utility of the direct commodity
derived from it. Hence there is no doubt that, so far, we
have a condition of things that is precisely the reverse of a
determination of the economic properties of the direct com-
modity, by means of those of the instrumental commodity
from which it is derived. But let us now suppose that from
one instrumental commodity several direct commodities are
derived. These will constitute a so-called genetic group (part
i. chap. iv. § 7). For instance, from iron a number of pro-
ducts are derived, forming together with it, one genetic group.
We shall also make abstraction of the fact, that in reality
there is probably no example as simple as our hypotheses pre-
dicate, since there is possibly no instrumental commodity that
is not, at the same time, a complementary commodity. Let
the immediate commodities belonging to this genetic group
have various final degrees of utility.1 For instance, let I
be the instrumental commodity, and B1, B2, B3, the im-
mediate commodities derived from it, having final degrees
of utility respectively equal to 5, V, 9. By this supposed
difference in the final degrees of utility we mean to signify
that the commodities B1, B2, B3, taken separately, would have
those final degrees of utility.
Now it is asked in the first place, which of these various
final degrees of utility will determine that of the instrumental
commodity, I ? Evidently it must be the lowest degree among
those of the genetic group ; for if a part of I, i.e. of the avail-
able quantity of the instrumental commodity, comes to be lost
or destroyed, the remaining portion will, in the first instance, be
applied to the production of the immediate commodities belong-
ing to the group which have the highest final degrees of utility
(Gossen's theorem, part i. chap. ii. § 6), and it is only so
far as the stock suffices, that its employment will be extended
to the production of commodities having lower degrees of final
utility, i.e. corresponding to less urgent wants. If, e.g., the
quantity of money at our disposal is inadequate — and money
1 A condition not possible in perfect equilibrium, because a maximum of
utility is obtained, if the instrumental wealth is applied to the production of
the several direct commodities in such a manner that these have equal final
degrees of utility, or rather, final degrees which are proportional to cost in the
same ratios (part i. chap. iii. § 2). In practice the scale supposed by Wieser
is possible.
CHAP, in THE LA W OF DEMAND AND SUPPLY 183
is the instrumental commodity par excellence — we shall procure,
or produce, with what we have, first those things that are
most indispensable, and only so far as the sum at our disposal
admits of, shall we proceed to procure things corresponding to
less painful wants. Thus the diminution of the supply of an
instrumental commodity curtails the availabilit}" of those com-
modities which have the lowest degree of final utility, and
thus it only occasions us a pain equivalent to the one caused
by the absence of the means of supplying the last wants that
we formerly satisfied. But that is equivalent to saying, that
the final degree of utility of the instrumental commodity, I,
is equal to the final degree of utility of that member of the
genetic group of commodities which has the lowest degree of
utility for each individual.
Hence, in our example, I will have the final degree of
utility derived from B1, viz. 5.
But this knowledge aids us in the solution of a further
question which presents itself, viz. what influence can the
final degree of utility of the instrumental commodity exercise
on the final degrees of utility of the immediate commodities
composing the genetic group. For it is obvious that if the
commodities B2, B3, etc., can be produced ad libitum by means
of the instrumental commodity I, their final degrees of utility
cannot be greater than that of I. In fact the loss of the
commodity B2, whose final degree of utility is 7, only imposes
on us the pain of forgoing a part of I, in order to reproduce
B2, or in other words, of suffering a non-satisfaction already
know as equivalent to 5. The same reasoning applies to B3,
and to successive commodities. Hence we find that the final
degree of utility of the instrumental commodity, being less
than that of some of the commodities constituting the genetic
group, will by its reflex action determine their final degree of
utility ; and ultimately we find that the final degree of utility
of that member of the genetic group, which ranks lowest, de-
termines the equivalence to itself of the final degree of utility
of the instrumental commodity ; and this in turn determines
the equivalence to itself (and consequently also to the degree
of the immediate commodity that ranks lowest) of the final
degrees of utility of the other immediate commodities belong-
ing to the genetic group. In the accompanying diagram 'this
184 THE THEORY OF VALUE PART n
process is indicated by means of arrow-heads. The final degree
of utility of B1, i.e. (5), determines that of I (5), and this in turn
suppresses the final degrees of utility originally pertaining to
B2 (vii.) and B2 (ix.), and substitutes its own
index (5).
This law should be called after Wieser,1
who was the first to expound it, and to
investigate it in its minutest details.
It is evident that if, owing to any
circumstance whatsoever, the power of reproducing B2 or
B3 by means of I is interrupted or suspended, or if the nexus
between I and B1 is dissolved, each of these commodities
resumes its own final degree of utility. This occurs in a
certain form of economic crisis.
The nexus we have shown to exist between instrumental
and immediate commodities, not only corrects the current theory,
but explains moreover why it is a mistake to believe that the
value of the commodities consumed in a process of production is
the cause of the value of the products ; for in so far as the
final degree of utility is the price of commodities in an ex-
change, and in a genetic group of commodities all, with the
exception of the lowest in order of utility, substitute for their
own final degree of utility, that of the instrumental com-
modity from which they are derived, it is clear that the above
doctrine is also partially true, being based on an incomplete
observation of facts.
The law we have expounded may now be complicated at
pleasure. Thus we may suppose the instrumental commodity
to be at the same time supplemental to other commodities ; to
have a final degree of utility of its own as an immediate com-
modity ; to be of a very remote degree, etc. All these varia-
tions, however useful they may be, necessitate the introduction
of no element that has not been already considered.
We therefore pass on to expound the scientific meaning of
cost, and the forms which it may assume.
1 F. v. Wieser, Ueber den Ursprung und die Hauptgcsetze des w. Werthes,
Wien, Holder, 1884, part iv. § 2, pp. 139-180 ; Der naturliche Werth, 1889,
part v. pp. 164-204.
CHAP, in THE LA W OF DEMAND AND SUPPLY 185
§ 5. That Cost and its Remuneration are Antithetical
Conceptions
From the considerations already set forth (part i. chap,
ii. 8 4) it must be clear, that the conceptions, cost and
remuneration of cost, constitute the most profound antithesis
in economic science. Senior and Cairnes treat this as a
fundamental theorem.1 In fact, industrial progress, i.e. the
realisation of hedonic maxima, consists in altering the propor-
tion between cost and remuneration, diminishing the first and
increasing the second. This antithesis, as Cairnes observes, is
so real, that a small cost, or a large remuneration, are convertible
terms. Now, the wages of labourers are for them the remunera-
tion of the cost, or pain, they submit to in working ; whilst
profits are the remuneration of the cost incurred by the
capitalist. If the opposite thesis were true, then the cost
of production, however great the industrial progress or
retrogression might be, would always be constant. In fact,
suppose some industrial progress to have been realised, in con-
sequence of which capitalists and labourers receive, in return
for the same amount of expenditure and toil, a larger
quantity of products, so that the produce to be divided
between wages and profits comes to be more than it was
previously, we should nevertheless have to say that the cost
of production is unchanged, because the aggregate wages and
profits would have increased in proportion to the progress
realised. It is of course perfectly legitimate to consider the
wages paid as a part of the capitalist's cost of production ; but
the sacrifice involved in the production of a commodity is not
limited to the capitalist. If this were so, high wages should
be regarded as an obstacle to production, whereas they are
the effect of the productiveness of labour, just as much as large
profits, which from the labourer's point of view, should be
considered in the same light as large wages are from the
point of view of the capitalist.
1 Cairnes, op. cit. p. 49 ; Senior, op. cit. pp. 589, 590 ; Cliffe Leslie, Essays,
ed. 1879, London, Longmans, n. xii. p. 180 ; ed. 1888, n. iv. p. 41.
186 THE THEORY OF VALUE PART n
§ 6. Of the Law of Variation in the Productiveness of Cost
The ratio in which cost is to remuneration may vary con-
siderably, owing to a number of conditions subject to which
we may suppose the production to have been effected, or under
which it actually has been effected. The variations in the
efficiency or productiveness of labour, or cost, may neverthe-
less be regarded as subject to only two groups of forces. Of
these the first group is comprised under a law known as the
law of decreasing productiveness, whilst the other is comprised
under a law known as that of increasing productiveness.1
The term law of decreasing productiveness has however a
twofold meaning, according as it is used in a wider, or a
more restricted sense. In the latter acceptation,' the law
affirms that, after a determinate limit has been reached in the
ratio between the amount of labour employed and each unit
of the natural forces available, the productiveness of each unit
of effort or cost tends to decrease in the agricultural and
extractive industries.
In other words, the productiveness of labour, on the above
hypotheses, would present, if expressed graphically, the same
curve as the degrees of utility (part i. chap. iv. § 3) ; i.e.
it would be positive up to a certain point, and after that
negative. The demonstration of this so-called law, which in
reality is simply a premiss of economic laws (part i. chap, i.),
must either be obtained from the examination of facts, or
be replaced by the transformation of the law into a postulate
or hypothesis.2
In any case, the truth of the proposition is obvious. It
is a matter of everyday experience that one cannot, by
doubling the capital or labour expended on a piece of land,
continuously double its produce ; and this alike whether the
land be used for farming, for building, for mining, or in any
other way whatsoever.
The limit at which the law of the decrease of productive-
1 The publication of the treatises of Marshall and Pareto necessitate these
laws being restated in a very different way and in a different connection. See
post, a short addition on Rent.
2 For the graphic expression of the cost curve see post, § 7.
CHAP, in THE LA W OF DEMAND AND SUPPLY 187
ness comes into operation, depends on the stage of civilisation
attained, and recedes with every advance in the technical arts
and in the organisation of labour. Before the limit is reached,
the opposite law prevails, viz. the law of increasing productive-
ness, which affirms, that up to a certain limit, every increase in
cost, or in the amount of labour expended, yields in every
industry a more than proportionately increased product, and
that in manufacturing industries this increase is continuous.
This law likewise is purely empirical ; division of labour,1 the
facilities of communication, improved organisation, are all
means of increasing productiveness, and are rendered possible
by the growth of population and the abundance of capital.
The law of decreasing productiveness has however a wider
meaning, inasmuch as it affirms that, despite the continuously
increasing productiveness of labour in manufacturing industries,
such productiveness beyond a certain limit, more remote indeed
than is the case in agricultural and extractive industries,
decreases also in the above-mentioned industries, owing to
the increased cost of the raw materials that are used in them,
and which are ultimately due to agricultural or extractive
industries. In other words, in the latter industries the law
of decreasing productiveness preponderates directly ; whilst in
manufacturing and commercial industries the influence of the
law of increasing productiveness preponderates directly ; but in
the productive system in general the law of decreasing produc-
tiveness preponderates indirectly, but universally.
Having regard to these two laws, we may, at a given
moment, and with respect to a given market, divide all products
into various classes. The first class will be made up of those
commodities of which a larger quantity than that available at a
given moment, in a given market, may be obtained l>y a simply
proportionate increase of cost ; the second class will comprise
those products which can be increased at a less than propor-
tionate cost. And finally the third class will consist of such
products as cannot be increased, at a given time and place,
except at a more than proportionately increased cost. How
important the distinction is between these various progressions
1 How a saving of cost is effected by the division of labour, or rather by
co-operation, is a question of practical economics, or rather of pure technology,
just as much as the comparative merits of two machines.
188 THE THEORY OF VALUE PART n
of cost, or between the various forms that may be assumed by
the curve of costs, is already evident from the fact that only
the final degree of cost coincides with the final degree of
utility, or in other words, with the cost of the last portion
still in demand of a particular commodity. But further it
will be seen presently how cost contributes in varying
measure, according to its progressiveness, to the determination
of the point of equivalence of reciprocal demands, i.e. of
demand and supply.
§ 7. Of the Influence of Cost on the JRate of Interchange under
Conditions of Free Competition. Theorems of Ricardo
and Marshall. Stable and Unstable Equilibrium of the
Quantitative Index.
If we suppose a number of perfect hedonists, and the
absence of any obstacle to their acting in conformity with
their several interests, under an economy of divided labour,
in which each one works only for a common market, we
deduce from the conception of the cost of production, under-
stood as a sacrifice or pain annexed by nature to the
attainment of the largest amount of commodities, a theorem,
which may be formulated as follows : the value of the products
of each producer must be in proportion to the cost incurred in
order to obtain them.
For each one will devote himself to the particular branch
of industry in which the ratio of remuneration to cost is
greatest ; and according to the supposition he can do so. But,
equally according to the supposition, the remuneration consists
not of the direct utility of the commodity produced, but of its
instrumental utility, i.e. its purchasing power. Hence the
production of articles whose value commands a more ample
remuneration, will be increased, whilst the production of wares
which command a less remuneration, will be diminished. But
the increased availability of the more remunerative products
will lower their price, as expressed in quantities of other pro-
ducts, until an uniform proportion has been established between
cost and remuneration in every branch of industry, in other
words, until value is everywhere proportioned to cost. This
theorem is easily translated into terms of degrees of utility ;
CHAP, in THE LA W OF DEMAND AND SUPPLY 189
for on the hypotheses we have framed, viz. that each individual
produces only such commodities as possess for him a special
instrumental utility, viz. the capacity of being exchanged, in
given ratios, for such commodities as are endowed for him
with direct utility (part i. chap. iv. § 5), and that each indi-
vidual can change his employment, it is clear that each will
prefer the production of that instrumental commodity which,
at the prevalent rate of interchange, yields him the largest
supply of direct commodities ; and this must, by modifying
the proportions in which the instrumental commodities are
available, modify in such wise their rates of interchange, that
the differences between the comparative degrees of utility of
the respective commodities placed on, and withdrawn from, the
market by each individual become equal for all.
This theorem, which we attribute to Eicardo or Cairnes, is
so important, that it is worth while showing that it is simply a
corollary of another with which we are already acquainted (part
i. chap. iv. § 10). In fact, supposing two isolated individuals,
each of whom has to provide for his own wants, we already
know from the theorem of Gossen or Jevons, that each will so
distribute his energies as to obtain the maximum quantum of
utility, and that this distribution will depend, on the one hand,
on the comparative degrees of utility of the several products,
and on the other hand, on the comparative degrees of efficiency
of his labour in the several channels. But the comparative
degrees of efficiency of his work are the reciprocals of the costs.
Simplifying the data of the problem, we may suppose that in
each branch of industry, or of productive activity, the effici-
ency of their labour is the same, so that each one will distribute
his energies with regard solely to the final degrees of utility
of the products. Now let us suppose that these individuals
wish to divide their labour amongst themselves, perceiving
that by this means the absolute efficiency of the labour of each
is increased to an equal extent, or in other words, that the
absolute costs are reduced for each of them to an equal extent ;
and this in consequence, say, of the increased proficiency at-
tained by each, through his pursuing one employment, instead
of two or more. In this case it is evident that the division
of labour cannot entail on either of the two supposed indi-
viduals a comparative loss, i.e. that the ratio of exchange must
190
THE THEORY OF VALUE
PART II
correspond to the respective efficiency of their labour ; for the
quantities produced by each, or the reciprocal offers, will be in
this ratio ; and moreover the party prejudiced may always,
by threatening a return to the former condition of undivided
labour, obtain a division in accordance with this ratio. It is
further evident that, instead of considering a nation as com-
posed of many individuals, each having a special aptitude to
produce a determinate commodity, or being specially efficient
in his own department of industry, or, in terms that are still
substantially the same, each realising in his own department
of industry a specially advantageous ratio between cost and
remuneration, — we may consider the nation as a single
DIAGRAM XXXVIII.
individual distributing his power of labour among many
branches of production ; and it is clear that the results of the
division of labour among many individuals, and the distribu-
tion of commodities consequent on exchanges, must be the
same as are obtained, in the case of a single individual, by the
distribution of the quantity of available labour among many
employments.
Eicardo's theorem, according to which, under conditions of
perfectly free competition, commodities susceptible of repro-
duction are exchanged in accordance with the ratio of the
costs, necessitates our considering the cost of production as
the index of the available amount of every commodity. This
doctrine is summed up in the following elegant theorems
of Professor Marshall.1
1 A. Marshall, Pure Theory of Domestic Values. The original English text
CHAP, in THE LA W OF DEMAND AND SUPPLY 191
Let the quantities of a given commodity be measured
along OX in the diagram XXXVIII., and along OY the prices,
whether in money, or in some other commodity, of a metrical
unit of the first commodity. From what has been said
before (part ii. chap. ii. § 1), we know already that if a de-
terminate quantity of commodity can be sold at a given price,
a larger quantity can only be sold at a lower price, and that
consequently the series of prices per unit corresponding to in-
creasing portions of a given commodity, sold in a market in a
given period, presents the form of a negative curve.1 This
curve is therefore traced in the following manner : —
Let m1 be any point on OX, and let the price at which it
is possible to dispose of Om1 commodity in a given period, be
estimated and found to be equal to On1 on OY. Draw m1p1
and n^i at right angles to OX and OY respectively, to meet
in pr Then pl is a point on the curve. By causing ml to
move continuously from 0 along OX we shall obtain a
continuous series of positions for p^ which will be such that
each increase of Oml will involve a diminution of plm\ Let
the curve which is the locus of pl be called the Demand
Curve. Its definition will be, that DD1 is such that if any
point pl ~be taken on it, and plml be drawn perpendicular to
OX, plml represents the price per unit at which an amount of
the commodity represented ly Ora1 is capable of being sold in
a given time and place.
On similar principles we may draw the Supply Curve
CC1. Every increase in the quantity of a commodity pro-
duced and offered may involve an increased, or a diminished,
or a proportionately equal cost. The form of the supply
curve will vary according as it is adapted to one or other of
these several hypotheses, i.e. it will be either positive or
negative. Let us first suppose the law of increased produc-
tiveness to prevail, i.e. that the cost of production increases
more than in proportion to every increase in amount supplied.
Let m2 therefore be any point on OX (diagram XXXVIII.) ;
let On2 on OY be equal to the cost of production of a metric
of Prof. Marshall's theorems is of course slightly different from the text here
given, as this text is a re -translation from the Italian.
1 XVII. Theorem of Professor Marshall. It is equivalent to saying that
DD1 cannot cut more than once any perpendicular to OX or OY. With
reference to the curve of supply, see post.
192
THE THEORY OF VALUE
PART II
unit of 0?ft2 amount of commodity. Draw m2p2 and n2p2 at
right angles to OX and OY respectively to meet in p2. Then
p2 is a point on the curve. By causing ra2 to move con-
tinuously from 0 along OX, and finding the position of p2
corresponding to each position of ra2, we can obtain a con-
tinuous series of positions for p%, which is such that for each
increase of Om2 we have an increase of p2m2.
We may then define the supply curve thus : CO1 is such
that if any point p2 be taken on it, and p2m? drawn perpen-
dicular to OX, p2m2 represents the cost per metrical unit
involved in the production of an Om2 amount of commodity in
a given market and period.1
1 The correct method of considering a supply curve is still the subject of
controversy. In Prof. Marshall's diagrams the supply curve is a curve of
expenses per unit in function of quantity produced. It may seem doubtful
whether it is convenient to consider the intersection of such a curve with the
demand curve. To make matters clear, I give in the following table (1)
successive quantities of produce, (2) the total cost of each quantity, (3) the
cost of every unit in function of the several quantities : —
Quantities produced.
Total expenses.
Cost per unit.
100 units
200 ,,
300 ,,
400 ,,
500 „
150 sh.
200 „
450 ,,
800 „
1250 ,,
14 sh.
1 „
14 „
2 „
24 „
Such a curve may be useful for other purposes. For the uses to which it is put
by Prof. Marshall, a curve of marginal expenses, or marginal cost in money,
might be preferable. I suppose this question will be definitely settled by
Prof. Marshall when he publishes his second volume. Here I shall only explain
what is meant by a curve of marginal cost in terms of money. Suppose we
have a table of quantities produced, as above, or even more complete, like the
following one ; suppose we know the total expense of each quantity produced,
again as above, or as follows ; then subtract each column of total cost from the
one which follows and call this the marginal expense : —
Quantities produced.
Total expenses.
Marginal expense.
10 units
15
15
12
154
4
14
16
4
16
17
18
18
i
20
20
2
22
22
2
24
25
3
26
29
4
28
85
6
30
45
10
It is easy to draw such a curve. Measure on OX ten units. Construct over
CHAP, in THE LA W OF DEMAND AND SUPPLY
193
But the supply curve, i.e., the curve of the expenses of
production, may also be decreasing, or partly decreasing and
partly increasing, since it may happen that an increase of the
quantity produced is, within certain limits, accompanied by
a diminution of cost, but that beyond those limits, it involves
increased cost. Hence it is obvious that the supply curve, or cost
curve, may assume the most various forms, as e.g. the CO1 in
diagram XXXIX. If the cost of production is independent
DIAGRAM XXXIX.
of the quantity of commodity produced, i.e., if it remains the
same per metric unit of commodity, as happens, for instance,
in the case of a tax levied on each metric unit produced in a
uniform manner, the cost is expressed by a straight line like
cc1 in diagram XXXIX. If the original cost per unit of a
commodity is increased by the addition of a specific tax, the
curve of cost becomes a parallel to CC1, like 77* in the above
diagram.' If the tax is ad valorem, i.e. dependent on the
price of the commodity, every point of 77* will be in a con-
stant ratio to the distance of the corresponding point of CC1
them an area = 15 sh. Then take on OX two more units and construct over
them an area = ^ sh. Then take two more units on OX and construct an area
= another \ sh. Go on taking two units on OX and construct over every two
units areas equal to : 1, 1, 2, 2, 3, 4, 6, 10 shillings. Every increment of
produce on OX will then have over it an area equal to the increment of cost,
i.e. to its marginal cost in money. If the increments of produce are very small,
the increments of cost will form a curve. See E. Barone, Giornale deyli ec.
Feb. 1896, "Studii sulla distribuzione. "
0
194
THE THEORY OF VALUE
PART II
from the axis OX. Indeed there is only one law to which
the supply curve must in all cases conform (diagram XL.),
viz. that the same amount Om cannot have two different costs, p2m
and qm. This is formulated in the theorem that the supply
curve cannot cut twice any straight line perpendicular to OX, i.e.
it cannot have the twisted form of CC1 in diagram XL. ;
for if it were to take this form, we should have to read the
diagram thus : that the amount Om of any given commodity
represents, in the same place and period, a cost denoted by
the two unequal lengths p2m and qm. Now let us designate
m
DIAGRAM XL.
as the index of the available amount of a commodity, the
quantity that would be produced if the quantity actually pro-
duced at a given moment increased according to a continuous
or constant scale, and graphically (diagram XLI.), r being
a point on OX, let Or measure the amount of commodity that
would be produced in a year, if the scale on which the
production is carried on at a given time were continued
uniformly. We then have a first fundamental theorem by
Professor Marshall, respecting the movement of the amount-
index, which runs thus : Let a vertical straight line drawn
through the amount-index cut the demand curve in d and the
supply curve in c. If d is above c the amount-index will tend
to move to the right. If d is below c, the amount-index will
tend to move to the left. If d coincides with c, as at a, the
CHAP, in THE LAW OF DEMAND AND SUPPLY
195
amount-index will le in equilibrium, tending to move neither
to the right nor to the left1 (diagram XLI.) In fact the
amount Or of commodity can be produced at a cost re, and
a price re is therefore remunerative. This appears from
the fact that the point c is on the supply curve CC1.
But for 0?- we obtain a remuneration rd. Now if rd is
greater than re, the producers' profits are the larger, the
greater is the difference between price and cost; hence they
will increase their production, or other producers will join them
in order to share their profits. Thus the quantity produced
DIAGRAM XLI.
will l)e greater, i.e. the amount-index will move to the right, as
is indicated by the arrow-heads in diagram XLI. On the
contrary, if the price rd, at which the amount Or can be sold,
is less than the cost re, some of the producers will withdraw
from this branch of industry, either voluntarily or under
stress of insolvency, and the amount produced must diminish,
i.e. the amount-index must be shifted towards the left. But if
rd coincides with re, then industry is normally remunerative,
that is, the price rd paid by the consumers just covers the
producers' expenses, re, and the amount-index will incline
neither to the right nor to the left. This equality of rd and
re is realised whenever the curves of demand and supply cut
one another; so that the amount -index is in equilibrium
1 Prop. XIX. in Professor Marshall's Pure Theory of Domestic Values.
196 THE THEORY OF VALUE PART n
whenever it is vertically below an intersection of the curves
of demand and supply.1
In accordance with the above theorem on the movement of
the amount-index, we may say, that if in diagram XXXVIII.
the index is between 0 and m3, it must move to the right ; if
it is beyond ?/i8, to the left ; or in other words, that if it is
moved away from the point m3, it tends to return, and the
direction of the movement is denoted by the arrow-heads on
the abscissa. So too we may say, that if in diagram XXXIX.
the amount-index is between 0 and m, it will tend to move
towards m, that is to the right ; if it is beyond m, between
?7i and n, it will tend to move towards m, that is to the left.
Hence if the index were at m, and happened to be displaced
by any fortuitous circumstance, it would return to that point ;
on the contrary if the index were at n, and happened to be
displaced, it would not return ; but would, if displaced towards
the left, be attracted to m, and if displaced towards the right,
be attracted to p ; for also in p there is a point of equilibrium
to which the amount-index must, if displaced, return. Hence
we may say, that the equilibrium is sometimes stable and
sometimes unstable, and this according as the Demand curve is
above, or below, the Supply curve when it reaches the point of
intersection.2
The points of stable and unstable equilibrium alternate if
the curves cut one another more than once ; and the last
intersection must necessarily be stable. The first may be un-
stable, but in that case the production of the commodity is
unremunerative for quantities below a certain limit, and their
production will be attended by loss, which may however be
compensated, e.g. by a protective bounty, i.e. by an anti-
economic element.3
1 Wicksteed, op. cit. p. 116.
2 Prop. XXI. in Professor Marshall's Pure Theory of Domestic Values.
3 I omit Professor Marshall's interesting observations on the permanent
modifications every economic event produces of the conditions under which the
subsequent event will be developed. Such questions exceed the limits of this
manual.
CHAP, in THE LA W OF DEMAND AND SUPPLY 197
88. Of the Reciprocal Demand between Close Markets. Pro-
fessor Marshall's Proposition respecting the Forms of
Reciprocal Demand Curves and the Stable and Unstable
Equilibria they constitute.
Having shown in the last paragraph how the cost of pro-
duction in markets between which industrial and commercial
competition x is fully operative, creates a normal value, to which
current values tend to approximate ; and how the normal value
may be stable or unstable, it remains for us to see whether
there do not likewise exist normal rates of interchange between
close markets, towards which current rates must tend, and
stable and unstable equilibria of normal rates.
The problems presented by interchange between close
markets are incapable of being solved without the aid of
graphic or analytical methods.2 Our investigation must
therefore be directed first to the shapes that may be assumed
by the curves of reciprocal demand. Given the curves, we
shall see which intersections express stable, and which unstable
rates of interchange ; we shall also see how many, and what,
rates of interchange satisfy the equation of reciprocal demands.
A. Laws of the Curves of Reciprocal Demand
Let us suppose two non - competing groups, or close
markets, trading with each other, but only with each other,
and] let the value of all the wares exchanged by them be
expressed in terms of only two commodities, just as if only
these two were produced or exchanged ; and farther let the
1 Economists distinguish between commercial and industrial competition.
The latter is the competition that takes place between producers of different pro-
ducts, and has the effect of rendering remuneration universally proportionate to
costs ; the former takes place between vendors of the same product, and has the
effect of levelling prices. Close markets are markets between which there is no
industrial competition. It would be wrong to speak, with reference to them, of
the existence or non-existence of commercial competition, for they are supposed
to carry on their exchanges with different products, namely, each with those
commodities which it produces at the smallest comparative cost. (See ante, § 2. )
2 This is shown by the fact that Ricardo, Mill, and Cairnes have not solved,
and in many cases have not even adverted to, the problems solved by Cournot,
Walras, Jevons, Marshall, and Auspitz.
198 THE THEORY OF VALUE PART n
law of the cost of production expounded in the last paragraph,
be operative in both markets.
Three several conditions under which this trade may be
carried on must then be distinguished, and the properties of
the resulting curves of reciprocal demand be denned.
The normal condition will be that in which an increase of
exports from the one market to the other depresses the price
of the exported product (i.e. alters the rate of interchange to
the exporter's disadvantage), but not to so great an extent as
to cause the aggregate mass of imports to diminish. In other
words : an increase of exports determines an increase of
imports, but at a rate of interchange less favourable to the
market in question. Vice versd, a decrease in the exports
improves the rate of interchange, but not in such measure as
to prevent a decrease in the amount of imports.1
Next, let a first exceptional case be that of a decrease in
the exportation of a given commodity, raising its price to such
an extent on the foreign market as to increase the total
amount of the corresponding imports ; 2 which may be the
case if there is an urgent demand for this commodity in the
foreign market. Further, let a second exceptional case be that
in which an increase in the amount of wares which a country
produces for exportation, effects such a diminution in the
expenses at which it can produce them that the consequent
fall in value is greater on the home than on the foreign
market, and a proportionately smaller amount of imports is
obtained in exchange.
Now let these conditions be expressed in the language of
diagrams. Let the quantities of a given commodity, say cotton,
1 Professor Marshall's Pure Theory of Foreign Trade, § 2, p. 4. E.g. suppose
ten million yards of cotton to exchange for fifteen of linen, the rate of inter-
change being thus one yard of cotton to one and a half yards of linen. Suppose
the exportation of cotton to increase to fifteen million yards, and to procure in
exchange eighteen million yards of linen. The rate of interchange will then
have risen to 1 '5 yards of cotton to 1 '8 yards of linen, but the total amount of
linen imported will be greater than before. Or let the cotton exports be
reduced to eight million yards, and the corresponding imports of linen
amount to fourteen millions. The rate of interchange will then have fallen to
0*8 yards of cotton to 1'4 yards of linen, but the total amount of linen imports
will have diminished.
2 E.g. the exportation falls as before to eight million yards of cotton, but
sixteen million yards of linen are obtained in exchange, so that the rate of
interchange will come to be 0*8 yards of cotton to 1*6 yards of linen.
CHAP, in THE LA W OF DEMAND AND SUPPL Y
199
be measured along OX (diagram XLIL), and the quantities of
another commodity, say linen, be measured along OY; and
accordingly let OM on OX be a quantity of cotton, and let
ON equal to MP be such a quantity of linen that its sale in
the market where OM cotton is produced just covers the expense
of producing the latter. In other words, let ON or MP be
the quantity of linen that expresses the measure of the cost of
producing OM cotton in the cotton-producing market ; or let
ON be the minimum price in linen at which OM cotton can
be sold without loss. Now by moving N through every
m
M
DIAGRAM XLIL
possible position along OY, we shall obtain a series of MP, or
a curve 01, which will be the locus of P.
Let the curve 01 be the demand of a market, and let it
be defined by this peculiar property, that every abscissa, OM,
expresses the quantity of cotton that market is disposed to give
for the quantity of linen expressed ly the corresponding
ordinate PM.
Similarly we shall have the curve OG of the demand of
the other market, in which every pm will express the maximum
quantity of linen that market is disposed to give for the quantity
of cotton expressed by Om.
Every statement as to the shape which it is possible for
one of these curves to assume, has corresponding to it a similar
statement as to the shape which it is possible for the other to
assume ; but whenever reference is made to the abscissa in the
200 THE THEORY OF VALUE PART n
former, reference must be made in the latter to the ordinate,
and vice versa.1
The forms of the curves for the normal case and for the
first exceptional case are determined by the following common
propositions (diagram XLII.) : —
1st. The initial part of the curve 01 lies below the initial
part of the curve OGr. If that were not the case, the funda-
mental condition for the possibility of interchange would be
wanting (part ii. chap. i. § 3), viz., that the minimum price
demanded by the vendor for an CM portion, i.e. the perpendi-
cular PM, should be less than the maximum price the pur-
chaser is disposed to give for the same portion, i.e. less than
the perpendicular pm if drawn from the same point on OX.2
2nd. According to the definition, if PM of the curve 01
increases, the ratio of PM to OM increases likewise ; in other
words, the greater the amount of linen sold in the 01 market,
the less must be its purchasing power ; or again, the more
must the quantity of cotton, given for each unit of linen,
PM
decrease.3 If we draw the straight line OP, being equal
OM
to the trigonometric tangent of the angle POM, we may say
that as N rises along OY, the angle POM must increase, or
again we may say that every point of the curve 01, contained
between 0 and P, must lie below the points of the straight line
OP, whilst every point of the curve 01, beyond P, must lie above
OP produced.
Similarly as regards the curve OG-, given any point in it p,
if we draw the straight line Op, every point of OG between 0
1 Prop. I. in Professor Marshall's Pure Theory of Foreign Trade.
2 Prop. V. in Professor Marshall's Pure Theory of Foreign Trade.
3 On the other hand, in the curves of the second exceptional case (diagram
XLVI.), an increase in the demand for cotton, i.e. in the supply of linen, may
reduce the cost of producing cotton to such an extent, that although the value
of linen falls, owing to its increased supply, the value of cotton falls still lower,
and the new rate of interchange of cotton and linen proves less favourable than
the old one to the cotton manufacturers ; that is, in diagram XLVI., let tan
BOX be less than tan AOX, and tan COX be less than tan BOX, and a fortiori
than tan AOX. Then we have that notwithstanding an increase of the pro-
duction for exportation, i.e. of cotton, there takes place a proportionately
smaller importation of linen, because the fall in the value of cotton is more
rapid and extensive than the fall in the value of linen. — Professor Marshall's
Pure Theory of Foreign Trade, p. 13.
CHAP, in THE LA W OF DEMAND AND SUPPLY
201
and p must lie above Op, and every point of the curve beyond p
must lie below Op produced.
3rd. This may, as regards both curves, be expressed as
follows : neither 01 nor OG can cut more than once any straight
line drawn through 0 in any direction} In fact, every inter-
section expresses the rate at which a determinate quantity
of linen exchanges for a determinate quantity of cotton,
as, e.g., in point P, the ratio PM to OM. But for every
point on the straight line OP the ratio is constant (part ii.
chap. i. § 1) ; and as with any increase in the imports or exports,
the rate of interchange must vary, there cannot be a second
DIAGRAM XLIII.
intersection of the same curve 01 with the same straight line
OP.
Whilst these theorems define properties common to curves
of the normal case and of the first exceptional case, one other
theorem applies equally to all the three kinds of curves, viz.
that 01 cannot cut more than once any horizontal straight line,
nor OG- any vertical straight line. In other words, the forms
of diagram XLIII. cannot be realised, nor any we should
obtain by deflecting the curve OAB to the left, or by
turning Oab downwards.
In fact, in the normal case and in the first exceptional
case, a conformation like that of 01 and OG in diagram XLIII.
is already excluded by the theorem which negatives two inter-
sections with a straight line from 0 produced in any direction.
But also in the second exceptional case, in which the production
1 Props. II. III. and IV. in the above.
202
THE THEORY OF VALUE
PART II
of cotton on a large scale involves a very considerable reduction
in its cost, the saving thus effected cannot be such that the
absolute total cost of production of a larger quantity of cotton
will be less than the absolute total cost of a smaller quantity.
Now if a curve were to have the form of 01 in diagram XLIIL,
it would mean that 00 cotton is produced at an expense that
is just covered by the sale of AC linen, and that OD cotton,
Y
DIAGRAM XLIV.
which is more than 00, is produced at a cost that is just
covered by the BD quantity of linen sold ; and as AC is equal
to BD, the cost of a larger and of a smaller quantity of cotton
would be absolutely identical. The same reasoning applies to
OG, as regards the Oc quantity of cotton and the two, ac and
Ic, quantities of linen.1
As regards the difference between the curves belonging to
the normal case, and those belonging to the first exceptional
case, two theorems suffice to determine it.
1st. In the normal case every increase in the amount of
1 Prop. VI. in Professor Marshall's Pure Theory of Foreign Trade.
CHAP, in THE LA W OF DEMAND AND SUPPLY
203
linen offered for sale increases the amount of cotton that is
exported in exchange for it. That is to say : if from N any
point in OY, NP be drawn at right angles to OY to meet the
curve 01 in P, then the greater be ON, the greater also is NP,
or in other words, every increase of Pra is accompanied by an
increase of the corresponding Om. On the other hand, in the
first exceptional class of cases, the increase in On is at first
accompanied by an increase in np, but afterwards by a diminu-
tion, that is, 01, which had a positive direction, and retains it
in the normal case, becomes negative in the first exceptional case
(diagram XLIV.).
These properties are summed up in the proposition, that
the curves 01 of the normal case cannot cut the same vertical
o M z L X
DIAGRAM XLV.
line more than once, nor the curves OG- the same horizontal line ;
"but the curves 01 belonging to the first exceptional case may cut
the same vertical line, and the curves OG may cut the same
horizontal line more than once} The typical form of the curves
belonging to the first exceptional case is that given in diagram
XLV., whilst the typical form of the curve of the normal case
is that shown in diagram XLII.
2nd. In the normal case the curves 01 and OG- cannot cut
one another in more than one point ; in the first exceptional case
they may cut one another several (but always an odd number of)
times?
These theorems are corroborated by the following con-
1 Prop. VII. in Professor Marshall's Pure Theory of Foreign Trade.
2 Prop. VIII. in Professor Marshall's Pure Theory of Foreign Trade.
204
THE THEORY OF VALUE
PART II
siderations : Let A be a point of intersection of the two normal
curves OI and OG (see diagram XLIL); then AI must lie
entirely above the straight line OA produced, and AG must lie
entirely below OA produced : consequently AI and AG cannot
cut one another again. Nor can AI cut the portion of OG
which lies between 0 and A. For the portion of OG between
O and A must lie entirely to the left of a vertical straight line
through A, whilst AI must lie entirely to the right of this
straight line. Similarly AG cannot cut the portion of 01
which lies between 0 and A. Therefore 01 and OG cannot
cut one another except in A.
Now, every point in which the two curves cut one another
corresponds to an equilibrium of the rates of interchange} In
M
DIAGRAM XLVI.
diagram XLV. let A, B, C be points in which the curves belong-
ing to the first exceptional class cut one another, and let e.g. the
ordinate corresponding to the point of intersection C, be drawn
and called CL. Then since C is a point on 01, CL linen can
be sold in the cotton -producing market for a price that will
just cover the expenses of producing OL cotton ; and since C
is at the same time a point on OG, OL cotton can be sold in
the linen-producing market for a price which will just cover
the expenses of producing CL linen. That is, when OL cotton
is exchanged for CL linen, there is no force present in either
of the two markets to increase or diminish the supply or
demand. The same reasoning applies to the intersections of
1 Prop. IX. in Professor Marshall's Pure Theory of Foreign Trade.
CHAP, in THE LAW OF DEMAND AND SUPPLY
205
the curves in A and B. Therefore every intersection is a point
of equilibrium for the rates of interchange.
Proceeding to discuss the curves of the second exceptional
case, it must be observed that only two of the theorems set
forth above apply to this group, viz. the one according to which
01 cannot cut the same vertical line, nor OG the same
horizontal line, more than once ; and the one which defines
every intersection as a point of equilibrium of the rates of
interchange.1 The typical form of the curves belonging to
the second exceptional class is given in diagram XLVI.
B. Theory of the Stable and Unstable Equilibria of the
Eates of Interchange
Given the curves 01 and OG of whatever class (diagram
XLVII.) and whatever rate of interchange, PM to OM, at a given
o M x
DIAGRAM XLVII.
moment, the point P is called the exchange-index. Since 01
cannot cut a horizontal straight line through P more than
once, and OG cannot cut a vertical straight line through P more
than once, we may therefore have the following definition : A
point P is said to le to the right or to the left of 01, according as
it is to the right or the left of the point in which 01 is cut ly
the horizontal straight line through P : and the point P is said
1 In the curves of the second exceptional case 01 and OG may therefore change
places. This means that in that case no transactions can take place for
quantities inferior to OM, unless anti-economic factors, e.g. bounties on exports,
indemnify the exporters of cotton (01) for the losses they incur until the trade
has attained the dimensions necessary to make it profitable to both parties.
206 THE THEORY OF VALUE PART n
to be above or below OG, according as it lies above or below the
point in which OG ^s cut by a vertical line through P. This
being premised, we have the fundamental theorem according
to which : if the exchange-index be at any time to the right of
01, it will tend to move to the left ; if it be to the left of 01 it
will tend to move to the right. Similarly if the exchange-index
be at any time above OG it will tend to move downwards ; if it
be below OG it will tend to move upwards.1
In fact let the index be to the left of 01 (diagram XLVIL),
and let NP produced cut 01 in Q.
Then since Q is a point on 01, ON linen can be sold in the
cotton-producing market for NQ cotton. But so long as the
exchange-index is at P, ON linen is being imported in exchange
for NP cotton. Hence the exchange of cotton for linen is at
that moment abnormally profitable for the cotton producers ;
consequently the exportation of cotton will increase and the
exchange-index will tend to move to the right. So if the
exchange-index lay at P1, it would show that whilst ON linen
covered the expenses of producing NQ cotton, NP1 cotton was
at that moment being given in exchange for it, i.e. that the
trade was extremely unfavourable to the cotton producers ;
consequently the production of cotton would tend to diminish, and
the exchange-index would tend to move to the left.
Similarly it is demonstrated that P, being below OG, must
tend to move upwards. Let the vertical straight line through
P cut OG in E, and OX in M. The exporters of linen are
disposed to give RM linen for OM cotton; for in their market
OM cotton can be sold for a sum that covers the cost of pro-
ducing RM linen. At that moment however they are only
obliged to give PM linen for OM cotton ; hence they make
large profits, and the exportation of linen must increase, so
that P will tend to move upwards. Had P been in any other
position, the same argument would have held good.
Now, P being subject to two forces, one vertical, the other
horizontal, it will follow a direction that is the resultant of
both. As no determinate quantitative ratio of these two forces
is given, though it always exists, all we can do is to infer a
movement of P in any direction comprised between a horizontal
and a vertical arrow head, such as PR and PQ. As it moves,
1 Prop. XI. in Professor Marshall's Pure TJieory of Foreign Trade.
CHAP, in THE LA W OF DEMAND AND SUPPLY 207
the index must strike either 01 or OG, but we cannot predict
which of the two curves it will strike first. In any case, as
soon as one of the curves is struck, the force that impelled the
index up to it, whether it be the vertical or the horizontal,
will no longer act on the index, and P will oscillate along the
curve that has been struck, subject to the remaining force, up
to A. At A the action of both forces is extinguished, i.e. a
point of equilibrium is reached.1
Now, let us, as before, designate as a stable equilibrium
an intersection of 01 and OG- to which P must return if it
were at any time deflected from it ; and let us designate, as
unstable equilibrium, an intersection to which P does not return
when deflected from it.
This being so, we have the theorem,2 that : The equilibrium
is stable at every point of intersection of 01 and OG, except-
ing those at which both curves are inclined positively, but OG
is more nearly vertical than 01, and excepting those at which
both curves are inclined negatively, but OG is more nearly
vertical than 01.
Let D be any point of intersection of 01 and OG (diagram
XLVIII.) Through it draw a vertical straight line Km and a
horizontal NQ. (Suppose this to be done e.g. at A in diagram
XLII. or at A, B, and C in diagram XLV.)
Now let us suppose 01 to be inclined positively, i.e. like £DI
in diagram XLVIII., and OG also to be inclined positively, but
less vertically than 01, i.e. like #DG. In this case we say, that
the equilibrium must be stable. In fact, wherever the index
may be, it will be subject to a vertical, and to a horizontal
force. If it is within the quadrant NDra, and below iD in P1,
under the influence of the horizontal force, it will strike first
£DI, and will then be attracted upwards towards D. If the
index is in P2 above gD, it will first be drawn downwards
until it strikes gD, and then it will be compelled to move
with the horizontal force to the right, oscillating along gD
towards D. Similarly if the index is at P3, it will have to
move towards D, whether it strikes DG or DI first.
By means of the same reasoning it is proved, that the
equilibrium is also stable if 01 is positive and OG negative,
1 Prop. XI. in Professor Marshall's Pure Theory of Foreign Trade.
2 Prop. XII. in Professor Marshall's Pure Theory of Foreign Trade.
208
THE THEORY OF VALUE
PART II
that is, if the latter enters through the quadrant NDK, and
passes out through the quadrant raDQ.
So too, it cannot be doubted that if 01 and OG are both
positive, but OG is more vertical than 01, the equilibrium is
unstable. In fact, let us suppose that iDI now signifies the
curve OG, and #DG the curve 01 ; then if P strikes first iDI, it
R
N
'.'>''' Q
r//
"4
D
DIAGRAM XLVIII.
is only acted on by a horizontal force to which it yields the more
readily, the further it is removed from point D, oscillating
downwards along iDI ; and if P strikes first #DG, it is only
acted on by a vertical force to which it yields by moving away
from D, and oscillating downwards along gDQ.1
The last of Professor Marshall's theorems on this subject
which we shall quote is that : If from a point of intersection
of 01 and OG, at which the equilibrium is stable, we proceed
along either of the curves in either direction until we arrive at
1 Supposing, e.g., the exchange index P has been jerked by some disturbance
such as war, a crisis, over-speculation, from C in diagram XLV. to a point within
the loop formed by 01 and OG between C and B. This will mean that cotton is
exported on the scale of OM instead of OL. Now the OM amount would not, under
normal circumstances, be paid for on the scale of more than QM linen, because in
the cotton-producing market, OM cotton can only be disposed of on terms which
just cover the expenses of producing QM linen. But owing to the supposed
fortuitous cause, the current price of OM cotton comes to be equivalent to PM
linen. When the disturbing cause ceases to operate, the producers of linen will
not pay for OM cotton more than QM linen ; in other words the exports of linen
will decline, or P is attracted downwards. But QM is such an amount of linen
as, if sold in the cotton-producing market, must be abnormally remunerative,
because QM cuts 01 at a very low point of the section OC, and FZ linen covers
CHAP, in THE LA W OF DEMAND AND SUPPLY 209
another point of intersection, this second point must be one of
unstable equilibrium, and vice versa.1
This proposition is obviously true. For if we proceed from
a point of intersection along that portion of 01 which lies
above OGr, the traction takes place in a vertical direction
towards the axis OX, until we reach the next point of inter-
section ; therefore that point of intersection is unstable. From
this to the next point of intersection the traction of OG- must
take place in a vertical, but upward direction.
the expenses of OZ cotton, i.e. of a quantity greater than OM. Hence the
exports of cotton will increase, and P will oscillate along OG from Q, through F,
towards C. At C there will be no inducement for either to increase or diminish
the production of their wares.
1 Prop. XIII. in Professor Marshall's Pure Theory of Foreign Trade.
PAET III
APPLICATION OF THE GENEEAL THEOEY
OF VALUE TO DETEEMINATE CATEGOEIES OF
COMMODITIES
CHAPTEE I
OF THE UTILITY AND VALUE OF INSTRUMENTAL COMMODITIES
IN GENERAL, AND OF THE GENERAL PRINCIPLES OF THE
DISTRIBUTION OF WEALTH.
THE general theory of value, when applied to determinate
categories of commodities having more numerous and more
specific properties than belong to commodities in general,
gives rise to a series of theorems having a more limited sphere
than those constituting the theory itself, but a correspondingly
richer content. Such applications of the theory of value may
be made with whatever degree of minuteness, by subdividing
the categories into species, and these again into subspecies, so
as to obtain an increasingly rich content for the definition of
the commodity whose value is to be determined.
For practical, rather than theoretical, reasons, the attention
of economists has been more particularly directed to the special
law of value of certain instrumental, and of certain immediate,
commodities. Chief amongst such special studies ranks that
which has for its subject that purely instrumental commodity,
money; and next in order come those dealing with three great
categories of commodities considered only in their instrumental
function, viz. land, capital, and human labour, together with
the direct commodities generated by that function, viz. rent
(and profit which is a kind of rent), interest, and wages.
Before discussing these subjects in detail, it may be well
to premise some general observations on the value and utility
of instrumental commodities, in order to amplify what has
been said on this point in part i. chap. iv. § 5.
There it was shown that the utility of an instrumental
214 GENERAL THEORY OF VALUE PART in
commodity, or of an aggregate of instrumental commodities
contributing to the production of one effect, is determined by the
prospective utility of the direct commodity it is expected to
derive from them. This was, briefly, the law of Gossen ; now
we have to expand it in conformity with, and within the
limits of, the canons formulated by him. Accordingly, various
hypotheses must be successively formed respecting the nature
of the instrumental commodity of which it is desired to
determine, first the degrees of utility, and then the value.
The most simple hypothesis is that of an instrumental
commodity fitted to produce BY ITSELF only ONE direct (or less
remote instrumental) commodity, and not being at the same
time itself a direct commodity. Next we may suppose an
instrumental commodity fitted to produce by itself, several
direct commodities, without being itself a direct commodity ;
and after this, an instrumental commodity producing only one
direct commodity, — not however ~by itself, but by the aid of
other instrumental commodities, which are therefore termed
complementary commodities — and not being at the same time
itself a direct commodity. Finally we may suppose an
instrumental commodity producing several direct commodities,
under conditions in every respect similar to the foregoing.
Subsequently we must consider the four cases arising on the
hypothesis of the instrumental commodity being itself also a
direct commodity, or having several uses as a direct commodity,
when that hypothesis is combined with other conditions.
Nor do the combinations that may be made of conditions
determining the nature of an instrumental commodity end
here ; for the latter may be either independent of, or subject
to, a vicarious relationship with some other instrumental
commodity. Moreover every complementary instrumental
commodity that contributes with another to the production of
a direct commodity, may, or may not, be vicarious. Lastly,
the direct commodity produced by the instrumental commodity
may be subject to vicariousness.
Now, in each of these combinations the instrumental com-
modity in question has a DIFFERENT final degree of utility, and
consequently also a DIFFERENT value. The principles exhibited
above suffice however to master all the cases arising from the
combination of the above-mentioned hypotheses, and of others
CH. i UTILITY OF INSTRUMENTAL COMMODITIES k. 215
that might be added. All that is necessary, as we have said,
is to elaborate them carefully in accordance with the following
principles : l —
1st. If a direct commodity may be used alternatively in
various ways (i.e. if it is susceptible of being applied to various
uses, but yet its available quantity and the nature of the uses
are such as to necessitate only one of them being selected) in
which it presents various final degrees of utility, it will be
put to that use in which its final degree of utility is highest.
In fact every other use would be anti-hedonic, because it would
leave in existence a greater pain than the one extinguished by
the use of the commodity. The final degree of utility of a
commodity susceptible of various uses is therefore given by
the predominant use.2
2nd. If an instrumental commodity serves alternatively
for the production of various direct commodities having
different final degrees of utility, it will be applied to the
production of the one having the highest degree.
3rd. If a direct commodity cumulatively subserves several
uses, it will be divided among them in such proportions as to
equate the final degrees of utility of the several uses (law of
Jevons) ; but if any portion of the available quantity of com-
modity is retrenched, and no redistribution is possible, that use
will be dispensed with, the loss of which causes us least pain,
in order that we may continue to enjoy the rest (corollary
of Jevons's law). Thus the final degree of utility of a com-
modity susceptible of several uses is given by the least of these.
4th. If an instrumental commodity subserves several uses
cumulatively, we have the same law, which is already known
to us as Wieser's law of the cost of production.
1 For fuller details see the subtle analyses of Wieser, Ursprung, etc., p. 170,
and Naturliche Wertli, p. 67.
2 As in societies where labour is divided every commodity may be utilised,
either as an article of direct consumption by the owner, or as an instrumental
commodity for procuring other commodities in exchange for it, every commodity
may be said to be susceptible of TWO ALTERNATIVE uses, and therefore of two
final degrees of utility. Now these are generally different, and vary with the
tastes of the owner of the article ; whence it follows that at certain times the
utility of a commodity to its owner will be greater as an article of consumption,
at certain others as an article of sale. In this phenomenon Menger recognises a
law of the displacement of the barycentrum of value, or of the final degree of utility.
— Menger, op. cit. p. 219.
216 GENERAL THEORY OF VALUE PART in
5th. If two or more instrumental commodities are comple-
mentary to each other in such a way that each is an in-
dispensable condition of the production of a direct commodity,
their joint utility is equal to that of the direct commodity.
But if we lose one of them, then inasmuch as the utility of
the remaining one is reduced to zero with respect to the
purpose we intended it for, the utility of the other is equal to
that of the direct commodity that could be produced by its
concurrence.
6th. If an instrumental commodity requiring comple-
mentary commodities in order to the production of a direct
commodity is not combined with them as required, its utility
is zero, unless it can be applied to other uses, either as an
instrumental, or as a direct commodity ; for in this case it
retains the final degree of utility due to these ulterior
conditions of utility which it presents.
7th. Hence it follows that if one of several commodities,
— all of which are mutually complementary with reference to
the production of a direct commodity, and each of which has
its own degree of utility in respect of certain other purposes it
subserves, — ceases to be in combination with the others, each
of the latter resumes its own degree of utility ; but the com-
modity so severed from the rest will have the final degree of
utility that would be ascribed to the combination, were it still
subsisting, MINUS the sum of the separate degrees of utility of
the other complementary commodities. In fact, taking an
example supplied by Bohm-Bawerk,1 if the complementary
commodities A + B + C produce in combination a direct com-
modity the final degree of utility of which is 100 ; whilst,
singly, B has a final degree of utility of 20, C of 30, and A of
10, then taken singly, they have a final utility given by
20 + 30 + 10, though taken cumulatively their utility was
equal to 100. Accordingly the owner of A + B + C must
estimate the loss of any one of these elements as equivalent to
a loss of 100 — (10 + 20) in the case of C, of 100— (20 + 30)
in the case of A, and 100 — (10 + 30) in the case of B.
8th. If two or more commodities are mutually vicarious,
i.e. if they produce the same hedonic or economic effect, though
they are distinct causes, the final degree of utility of the
1 Bohm-Bawerk, op. dl. p. 67.
CH. i UTILITY OF INSTRUMENTAL COMMODITIES 217
commodity which has the least degree determines the degrees
of the others. Thus, for instance, vicariousness exists, if a
commodity is susceptible of reproduction, between its final
degree of utility and its: cost of reproduction, as also between
a commodity and its substitute, etc. Now, when many comple-
mentary commodities concur in the production of a direct
commodity, some are vicarious with respect to commodities
subsisting apart from the combination, whilst others are not.
Hence the vicarious commodities pertaining to the combination
will have the final .degree of utility which this condition
attributes to them, whilst the rest will have a final degree
equal to that of the product obtained by the combination, less
the final degrees of utility of the vicarious commodities.
The influence of vicariousness in determining the final
degrees of utility is only an aspect of Jevons's law of indifference.
One labourer will be paid no more than another who can do
the same work ; one commodity will not fetch a higher price
than another which is in a vicarious relation to it. From the
above observations respecting the cases to which the doctrine
of degrees of utility, — and consequently also the doctrine of
value, which is based on the former, — may give rise, it is
evident that these cases may be extremely complicated, when
instead of relating to comprehensive categories of commodities
having few special properties, it extends to the analysis of the
degrees of utility and value of comparatively limited kinds
of commodities abounding in special properties, such as money,
land, capital, and human labour. These commodities possess,
in practice, the greatest importance as instrumental com-
modities ; but considering them only under this aspect, they
have such an abundance of special properties, that the first task
which confronts the economist, and complicates every other,
consists in collecting and ordering all these special properties,
i.e. in endeavouring to find definitions for these commodities.
Fortunately a large harvest has already been reaped in this
field by numerous economic writers, so much so that the
problems relating specifically to these commodities are in
certain respects more advanced than the generality of problems ;
and by means of slight corrections, frequently rather of form
than of substance, the solutions found for these specific
problems can be assimilated to those of more general problems,
218 GENERAL THEORY OF VALUE PART m
Under the title of questions relating to the distribution of
wealth, solutions have been found for the questions dealing
with the value of land, of capital, of labour, and for those
dealing with the value of the use of those respective com-
modities. For in endeavouring to reply to the question : in
what proportions is the product of a mass of the instrumental
commodities, land, capital, labour, distributed among the owners
(supposed to be different persons) of these several commodities ?
economists have always solved the question of the degree
(measured hedonically) in which each of these factors contributes
to the useful result produced, and the question of the value of
each of the complementary commodities that contribute to such
result.
We have therefore only to follow those writers in their
researches, by presenting the so-called theory of the distribution
of wealth, as a problem of value.1
The problem, how to distribute an economic effect, produced
by the concurrence or co-operation of several complementary
commodities, among its various causes, in other words, how to
proceed to the apportionment of the effect among its various
causes, has not yet been fully solved, for two different solutions
are propounded, each of which possesses great plausibility, so
that it would as yet be premature finally to reject either. The
first is that of Gossen (part i. chap. iv. § 5) adopted, but analysed
more minutely, by Menger ; the second is that of Wieser.2
Supposing several complementary commodities, say labourers,
instruments, and means of sustenance,3 yielding a product of a
given value, what portion of the latter is due to each of these
factors, i.e. what portion is due to the labourers, and what to
each of the other complementary commodities ?
Gossen measures the value of the complementary com-
modity that is eliminated, by the damage we suffer in conse-
quence, i.e. by the consequent diminution in value of the sum of
the complementary commodities that are left. Let A, B, and C be
three complementary commodities which, employed cumulatively
in the most efficient manner, yield a value denoted by the
1 This, as I have already observed, is by no means a new matter. It was
taught by Ferrara and others over thirty years ago.
2 V. Wieser, Der naturliche Wcrih, p. 80, § 22 ; p. 87, § 24.
3 Viz. labourers, auxiliary capital, and remunerative capital, as the latter are
called in terms introduced, I believe, by Bagehot.
CH. i UTILITY OF INSTRUMENTAL COMMODITIES 219
index 1 0 ; and let each of them, considered singly, or as a direct
commodity, have a final degree of utility denoted by 3, or be
susceptible, as a complementary commodity in oilier less re-
munerative combinations, of contributing to raise the value
of the latter by 3.
Now, as A, B, C, in combination are worth 10, whilst taken
singly each is worth 3, it follows that if, for instance, C falls
out of the combination, the value of the two remaining elements
is reduced to 6. Therefore for any one who already has A and
B, C is worth four. Thus too, for any one who already has A
and C, the element B is worth four, for by obtaining it he
would come to have a value of 1 0 due to A + B + C, whilst
the possession of A + C does not yield more than six.
This solution is deemed fallacious by Wieser, for as each of
the three elements has contingently a value denoted by the index
4, namely for any one who already possesses the other two,
he considers that the aggregate should be worth twelve, which
is contrary to the hypothesis. And this contradiction, which
he considers to be real, is due, in his opinion, to the fact that
the value of the several complementary commodities has been
erroneously estimated, owing to its having been determined in
accordance with the loss accruing from the absence of one or
other of them from the combination. He holds that, supposing
one element to be withdrawn from a combination, not only is
the effect due to it withdrawn, but the remaining elements are
likewise deprived of some portion of their effect, properly so-
called. He therefore propounds this other solution: —
As many equations of value should be made as the number
of combinations into which the complementary commodities in
question can enter. Let these be two, x and y, and let their
aggregate value be expressed by the index 100, so that we
have x + y = 100. Moreover let x form in combination with
another complementary commodity called z another equation,
say 2x + 3z = 29 0 ; and let y yield the equation, 4?/ + 5z = 5 9 0.
These equations give us 40, 60, and 70, as the respective
values of xt y, z, taken singly. Adding up the three equations,
we obtain the sum of 980 units of value, which are divided
into three parts for x, eight for z, and five for ?/, because
3x40 + 8x70 + 5x 60 = 980.
Wieser's solution does not seem to us to be called for by
220 GENERAL THEORY OF VALUE PART in
any aTropia, for it appears to us quite conformable with the
nature of complementary commodities that they should have
a different value according as they enter into the composition of
different combinations ; so that if A is worth 4 to any one
who already has B and C, and B is also worth 4 to any one
who already has A and C, it does not follow that in the
combination A -f B or in that of A + B + C, A and B will each
be worth 4. If we suppose both of them to be removed
simultaneously, only C being left, they have an aggregate
value of 7. If we suppose each of them to be replaced, one
after the other, the first is worth 3 and the second 4, and not
each of them 3^-, and still less 4. Moreover Wieser's solution
seems to us to run counter to the principle, that the final
degree of utility of a commodity is measured indifferently by
the degree of pain occasioned by its loss, or by the degree of
pleasure afforded by its acquisition.
CHAPTEE II
OF THE VALUE OF MONEY
§ 1. Money an Instrument of Exchanges
MONEY is an instrumental commodity in a paramount degree,
and is exclusively instrumental. Anything that serves as a
medium of interchange is money.1 It may be absolutely destitute
of all direct utility, incapable of affecting pleasurably any of
our senses, whether common or special, and incapable of reliev-
ing us of any painful sensation. The more the particular thing
we use as money is destitute of direct utility, the more essen-
tially is it money ; thus among gamblers counters are money.
Money is only endowed with an indirect utility consisting
in its power of obtaining for us, solely ly means of exchange,
some direct commodity; it is an instrument which procures
for us direct riches, solely by way of exchange. This is what
money is supposed absolutely to be in theory, and what it
often nearly is in practice. And money is in a paramount
degree an instrumental commodity, not only because its func-
tion is solely and exclusively instrumental, but further because
it discharges that function without the aid of any comple-
mentary commodity.
There is no intrinsic reason why there should not be
many instrumental commodities capable of serving as instru-
ments for the production of direct commodities, without the
aid of other instrumental, and therefore complementary, com-
modities, lut such is the fact. Hence money is the most
typical instrumental commodity. This, its distinctive pro-
1 Gossen, op. cit. p. 158.
222 GENERAL THEORY OF VALUE PART in
perty, has been generally expressed in the statement that
money has no value in use, but only a value in exchange, or
that it has only that kind of value in use which consists in
value of exchange ; in which case we may say with Ferrara
that the value of exchange is a species of the genus termed
" value in use." l
The need for money arises from the fact that, if exchanges
were to be made without it, the difficulty of effecting them
would be much greater. An exchange assumes that Primus
will find a Secundus who wants a commodity corresponding in
kind, quantity, and quality, to what Primus has to offer, at
the very moment when the latter wishes to dispose of it ; and
that Secundus has, and is disposed to deliver, either then, or
at some other determinate time, the kind, quantity, and
quality of commodity wanted by Primus.
If, on the other hand, there exists a thing called " money,"
which every one is ready to accept always, everywhere, and to
any amount, each exchange may be resolved into two ex-
changes which are much easier to effect than the former, not
only if taken singly, but even cumulatively. In fact Primus
will still have to look for a Secundus who wants a commodity
of the same quality as his, at the moment when he is pre-
pared to part with it ; but he need not concern himself about
the quantity required by Secundus, leaving it to others to
supply the deficiency, if any, in his offer, or selling the excess,
if any, to other purchasers. Still less need he trouble him-
self as to whether Secundus can supply him with the com-
modity which he ultimately wants. Having received money,
he can obtain what he wants from others.
Money is thus a purely instrumental commodity, facilitat-
ing barters, dividing them up into two or more purchases and
sales, or barters of wares against money, and vice versd. It
meets a want which arises when there already exists a regime
of divided labour,2 namely the need of trucking, which is not
1 A. Messedaglia, La Moncta: " In the case of money, not the material mass,
but the mass of value counts, and this alone."
2 Money presupposes a desire to exchange, and this in turn, a desire for a
division of labour, already recognised as an efficient means of reducing the cost
of commodities. This order of succession does not prevent money from render-
ing the division of labour possible on a much larger scale than would otherwise
be the case. — Gossen, pp. 92, 93.
CHAP, ii OF THE VALUE OF MONEY 223
an end in itself, i.e. not an immediate desire, but yet fully as
real1 as any other desire for instrumental commodities. Besides
the need of bartering, it presupposes a condition of fact, viz.
that all desire and accept money, being confident that they
can dispose of it whenever they want to. What the grounds
of this confidence may be, is immaterial : one thing will serve
the purpose of money equally as well as any other, provided that
an equal degree of confidence be placed in it. The causes that
may determine such confidence are all those which, in a
general way, enable us to foresee and to count upon the actions
of others, and they may be classed in the following order : —
We may be certain that the medium or instrument of ex-
change will be accepted by every one, if it be something
which satisfies a want experienced by all ; for we can then
count on the self-interest or positive hedonism of the first
comer, who will be ready and willing to accept money.2 We
may however also rely on a custom of accepting a given
thing as money ; in which case we reckon on the existence
of reflex acts, having their origin probably in a process of
selection, and from the influence of which only an insignifi-
cant, but intelligent, minority will be exempt.3 An agreement
may subsist to accept a given thing as money.4 Lastly, a
political superior may compel his political inferiors to accept
something as money; in which case compliance with the
order is hedonic, the motive being to shun pains.5 It is clear
that some or all of these circumstances may concur in a
particular case so as to render a thing acceptable as a medium
of exchange.6
1 Absurd questions have been raised as to whether if money consisted of
something possessing only an instrumental value, it would correspond to a real
or imaginary want. But is there any imaginary want that is not real, and
vice versd ?
2 Money, both in a primitive and in the most advanced stages of civilisa-
tion, has usually been and is a commodity endowed with direct utility, i.e.
with instrumental utility other than its monetary utility.
3 Amongst semi -barbarous peoples money is regulated only by custom.
4 This is almost always the practice among gamblers.
5 This occurs in the case of a forced paper currency.
6 That money must necessarily be a commodity endowed with direct utility,
or with some other instrumental utility than that of being a medium of ex-
change, is maintained by many economists. See e.g. M. Chevalier, Cours, vol.
iii. chap. i. p. 6, Paris, Capelle, 1886, 2nd ed. ; and Carl Kines, Geld und Credit,
Abth. I. 3, § 1, p. 140, Berlin, Weidmann, 1873.
224 GENERAL THEORY OF VALUE PART in
§ 2. Money a Common Denominator of Values
We have defined money, with reference to its primordial
and essential function, as a medium of exchanges. Ulti-
mately, money procures for us no commodity, and the quantity
an individual acquires in a year is not his income. It is
only the nominal price of things ; and the person who gives
it in payment acquired it previously by forgoing some direct
or some other indirect utility, and resells it for commodities
having some direct or some other indirect utility} It is a
machine for doing quickly and commodiously what would be
done, though less quickly and commodiously, without it.
From the function of money as a medium of exchanges a
further function follows, as a corollary, viz. that of serving as
the common denominator of the rates of interchange of all com-
modities. If no money existed, but only a perfect system of
divided labour, each commodity would present a determinate
rate of exchange for every other ; in other words, we should
have as many different ratios of exchange as are the Unary
combinations that can be made with as many factors as the
several commodities amount to.2 Hence if the commodities
were at all numerous, the different ratios of exchange that
would have to be taken into account in every transaction
would be extraordinarily numerous. But if each of these
direct barters of commodity against commodity is resolved
into a twofold exchange of commodities against some deter-
minate thing (which therefore serves as a medium), the exchange
power of every commodity will be expressed in terms of one
thing only, or in other words, this thing will have become
the common denominator of all values. This function of
money is thus implied in its above-mentioned function of a
medium of exchanges. Nor is any special property essential
to the serviceableness of money as a common denominator of all
prices, save its fitness to be resold by the purchaser ; that is, it
must have a power of exchange whatever the specific cause of that
1 J. S. Mill, Principles of Political Economy, p. 296.
2 Taking ra as the number of the commodities, the binary combinations are
given by m ™~ . E.g. for 100 commodities we have 4950 distinct ratios of
exchange. — Jevons, Money and the Mechanism of Exchange, 7th ed., p. 5.
CHAP, ii OF THE VALUE OF MONEY 225
property may lie. Money may consist of mere counters, such
as those used by players, or of pieces of paper destitute of any
direct, or of any other instrumental, utility.1
S3. Of other Contingent Functions of Money
The choice of one determinate thing, in preference to
many other possible things, as a medium of exchange is
effected, — like the choice of any other direct commodity,
among many possible ones, for the satisfaction of a direct
want, — by natural selection; consequently at various epochs
in the history of humanity the most diverse objects have
appeared most suitable to men, according to the extent of
their knowledge and the range of articles at their disposal ;
and it is obvious that this process of selection still continues.2
But, according as money consists of one commodity or
another, it discharges, by virtue of the merceological nature
of the substance it is composed of, a series of ulterior func-
tions, which must therefore be regarded as contingent, and not
necessary. Where money consists of sheep, cattle, or other
animals, it will serve the purpose of transferring values from
one place to another better than if it consisted, say, of some
species of fresh fruit ; but worse than if it consisted of precious
stones, or of metals possessing a high specific value. Money
consisting of animals which require to be fed, would also be
less adapted for the transfer of values in point of time, e.g.
from one year to another, than any ponderal money, com-
posed of common metals or stone, besides being less easily
divisible.
As a general proposition, we need only remark, that a
commodity will serve the better as an instrument of exchange,
the more its merceological properties render it acceptable to
all. These however must be estimated, not only in respect
of their number, but also in respect of the importance of the
needs to which they correspond, as is done in estimating a
1 F. A. Walker, Money, Macmillan, 1884, pp. 8, 9.
2 Gold monometallism is now driving out gold and silver bimetallism, and
Ferrara's opinion seems to be well founded, that other metals would stand us
in better stead than gold or silver. Whether this be so, will be proved by
the result , of selection. Fr. Ferrara's Introduction to Marietta's Work on
Money.
Q
226 GENERAL THEORY OF VALUE PART in
ponderal mean. The weightiest of these merceological pro-
perties— which indeed would render all others superfluous —
may of course attach to any object, if the law of a particular
State makes it legal tender, for a political superior can visit
any breach of the law by a political inferior with the severest
penalties. The following is a brief summary of the merceo-
logical properties a commodity must possess in order to be
serviceable as money : —
1st. Money must facilitate the transaction of exchanges in
all possible ratios, and must therefore consist of something
that is divisible indefinitely, and so that the sum of the parts
shall be equal in value to the whole ;
2nd. Money must facilitate the transaction of exchanges
at all times and places, and must therefore consist of a homo-
geneous matter, everywhere and always equal to itself, easily
discernible, endowed with universal * and constant direct utility,
relatively, and for the longest time possible ;
3rd. Money must facilitate payment at times and places
far apart from those when and where the obligations were
contracted ; and it must accordingly consist, if possible, of
something endowed with a high specific value, not perishable,
but durable,2 and again universally and always useful, subject
to the least possible fluctuations in value, so far as these are
due to its own conditions of supply ;
4th. Money must be a means of legally extinguishing
obligations with the least possible detriment to either party,
which again calls for each of the above-mentioned qualities.
As regards each of these several functions, some determinate
commodity has probably superior qualifications to any other ;
and the preference given amongst all civilised and semi-
civilised nations to metallic money, and more particularly to
two precious metals, realises mediately the law of the minimum
of action.
1 When a thing possesses direct utility, and its amount is less than the
demand, its acceptance by all, everywhere and always, is guaranteed by the
strongest of human motives, self-inti ;
2 The durability of the precious metals is the principal factor of their con-
stancy in value, for the quantity that is annually added to, or subtracted from,
the existing amount, comes to be irrelevant with respect to the latter. But
this very durability is in the long run a cause of increased fluctuation, that
is, it causes metallic money to be for long periods, a worse standard of value
than e.g. corn.
CHAP, ii OF THE VALUE OF MONEY 227
§ 4. Of the Value of Money
The value of money may be understood in two senses : 1st.
In a strict sense, the value of money is its power of exchange
expressed in a quantity of whatever commodities ; in other
words, it is the rate of interchange of money against wares.
Hence if the prices of wares in money are low, money has a
comparatively high purchasing power, i.e. a high value. If,
on the contrary, the prices of commodities rule high, since a
given amount of money will purchase comparatively little, its
purchasing power will be said to be small ; that is, its value
is low. The value of money is thus expressed inversely as
the prices of commodities in money ; that is, it fails when
these rise, and rises as they fall. If e.g. prices rise from
100 to 150, the quantity of commodity the same sum of
money can purchase falls from 100 to GG'66.1
2nd. The term, value of money, is used, though impro-
perly, to designate the payment made for its temporary use,
that is, for a loan of money. This payment represents the
value of the use of money, and is termed discount.2
Now what are the factors of the value of money, i.e. of its
power of exchange ? If money consists of a substance which,
besides its purely instrumental function as a medium of ex-
change, answers one or more other purposes, either as a direct,
or as an instrumental commodity, it will be subject to a two-
fold law of demand (part ii. chap. ii. § 1, and chap. iii. § 1),
viz. : 1st, to a law of demand, in so far as there is a demand
for instruments of exchange; and 2nd, to another law of
1 It must be observed that to the arithmetical average of prices corresponds,
not the arithmetical, but the harmonical average of the quantities of wares
purchased by a given amount of money. If prices rise from 100 to 150, the
quantities of wares fall from 100 to 66 '66. If the arithmetical average of
prices is 125, the corresponding quantity of wares is 80, not 83 '33, which would
be the arithmetical average. See Messedaglia, II cacolo dei valori medii, p. 37.
2 We must therefore avoid confusing the Value of Money, or its power of
exchange, with the Value of the Use of Money, or rate of discount. But still
more must we guard against confusing the value of money and discount with
interest, i.e. the Value of the Use of Capital. It is the more necessary to note
this, inasmuch as even J. S. Mill does not deal with this subject as clearly as
might be wished. Principles of Political Economy, p. 297. Prof. Sidgwick's
exposition is accurate, Principles of Political Economy, book ii. pp. 248, 260, 271.
228 GENERAL THEORY OF VALUE PART in
demand, in so far as there is a demand for the commodity
(whether direct, or instrumental otherwise than as money)
of which it consists. These two scales of the degrees of
utility (curves of demand) of money will vary independently
of each other, and will determine, as they rise, rises in value,
and as they fall, falls in value of the total mass of which, in
the particular case, the money consists. The two laws of
demand may vary in the same direction, each corroborating the
other, or in an opposite direction, each partially or wholly
neutralising the other ; and the occurrence of variations of
either law of demand, in one or other direction, has a degree
of probability of its own. Moreover, given a variation in one
only of the two laws of demand, and consequently a change
in the value of the total mass of which, in the particular
case, the money consists, this must in turn modify the
quantity of the total mass which will be demanded in con-
formity with the law of demand that has remained unvaried.1
But if we suppose a commodity which is exclusively a
medium of exchange, we are confronted by the fact that the
utility of the entire mass of the commodity set apart for such
1 Let us suppose two laws regulating the demand for gold, the first in respect
of its use as money ; the second in respect of its industrial consumption. Let
the two laws of demand, expressed by indices denoting the degrees of utility
of successive portions of gold, assume originally the following form for a series
of groups of individuals : —
First Law of Demand Second Law of Demand
Degrees of Utility of succes- Degrees of Utility of successive Increments for
sive Increments for each each Group of Persons —
Group of Persons— 1st, 2nd, 3rd, 4th, 5th, 6th, 7th Increment
15
14 14
13 13 13
1st, 2nd, 3rd Increment 12 12 12 12
11 11 11 11 11
10 10 10 10 10 10 10
99 8888888
666
Let the available quantity be 31 increments. These increments will be so dis-
tributed that 28 will be apportioned to the groups constituting the second law
of demand, and 3 to the groups constituting the first law of demand. The
final degree of utility of the mass will be 8, and this will also be the price of
each increment. The value of the entire mass will be 8 x 31 = 248.
Let us now suppose that whilst the second law of demand remains unvaried,
CHAP, ii OF THE VALUE OF MONEY 229
use, be it great or little, never varies. In fact, supposing a
regime of divided labour, so perfect that each person produces
only with a view to the market, that is, to exchanges, and
supposing that no barters be effected, all the wares will ex-
change against all the money, be it much or little. The
total value of the mass of money, that is the integral value
of the mass, or yet again the value of the aggregate amount
of money, will therefore be constant.1
Now, divesting the theory of some of its hypotheses, and
admitting that only a portion of the wares are put on the
market, and that moreover a portion of these are bartered
directly against one another, the demand for money, instead of
being determined by the whole amount of wares produced, will be
given by that portion which, within a given time, is exchanged
against money, i.e. by the requirements of circulation, and the
available quantity of money, — owing to a portion thereof
having been possibly accumulated and reserved for future
payments,2 will be given by the quantity actually used as a
medium of exchange, during the period considered, i.e. it will
be given by the quantity in circulation. It will still be
true that, since the work which money must do within a
certain time is a given quantity, the value of the total mass
of money that actually serves as an instrument of exchanges
the first is modified in conformity with the Roman numerals above the Arabic
figures : —
First Law of Demand Second Law of Demand
15
14 14
13 13 13
xii. 12 12 12 12
xi. xi. 11 11 11 11 11
10 x. x. 10 10 10 10 10 10
9 9 ix. ix. 8888888
666 vi. vi.
Let the available mass of 31 increments remain unaltered ; these will then be
distributed so that the persons composing the second law of demand will re-
ceive 21, and those composing the second law, 10 ; and the final degree of
utility of the mass will be 9, which will also be t^e price of each increment.
The entire mass will be equal to 9 x 31 = 279. With respect to the first group
the law of demand will have risen, whilst with respect to the second it will
have remained unaltered ; but for that reason the quantity demanded will have
decreased, i.e. the demand will be reduced or restricted.
1 A. Messedaglia, Moneta, p. 27.
2 J. S. Mill's Principles, iii. 8, § 3, p. 300.
230 GENERAL THEORY OF VALUE PART in
during that time, will be independent of its quantity. Nor
can the work that money must do vary by reason of any
variation in its quantity ; that is, no such variation in the
amount of money can cause an increase or diminution of pro-
duction, or an extension or restriction of immediate barters ; l
in brief, it cannot affect the factors of the requirements of
circulation.2
But if the integral value of money is constant, the value
of each piece of money, that is the unitary value of money,
must necessarily vary inversely as its quantity. Supposing
the volume of business transactions to remain the same, and
the quantity of available money to be doubled or halved, then
since the whole amount of money will be exchanged against
the whole amount of commodities, prices will ~be doubled or
halved, that is, the unitary values will be halved or doubled?
The unitary values of money are thus determined directly
as the demand for money, and inversely as the supply? The
requirements of circulation however, or the volume of business
transactions, which is the demand for money, resolves itself
into two elements, viz. the quantity of commodities offered
for sale, and the number of times that the same commodity is
bought and sold for money. Supposing the money prices of
all commodities in a market to be given, the quantity of
money required to maintain those prices is determined by
the quantity of the commodities, multiplied by the average
number of times that each is bought or sold before being
withdrawn from the market. Similarly the quantity of
money disposable, or offered, is not the same as the quantity
in circulation, for each piece of money passes through many
1 Or an extension or restriction of the amount of fiduciary paper, the value
of which, owing to its convertibility into money, must vary in accordance with
the value of money. Sidgwick, op. cit. pp. 251, 252.
2 On the effects of an increase or diminution of the quantity of money in the
multifarious and complicated conditions of actual life, see Walker, part i.
chap. iv.
3 Galiani, Delia moneta, iv. 2, 165, vol. iv. Custodi ; J. S. Mill's Principles,
p. 299. There may therefore be a general rise or fall of prices in money, as
there might be a general rise of prices in any other commodity, but not a
general rise or fall of values.
4 It is to be observed that the level of prices determined by the relation
between demand and supply of money serves also for the making up of the
ratios of exchange of products that are bartered, and are consequently not
offered in the money market.
CHAP, ii OF THE VALUE OF MONEY 231
hands, and must be counted for as many pieces of money as
the number of times it has done duty as money. The avail-
able amount of money thus comes to be likewise the product
of its quantity and of the rapidity of its circulation. The
value of the monetary unit will therefore be expressed by
qyj
the formula v= — ; in which the volume, of business trans-
qr
actions, i.e. the demand for money, is denoted by m, and the
supply of money by the product of its quantity q multiplied
by the rapidity of its circulation r}
The doctrine we have been expounding of the dependence
of the unitary value of money on its quantity, is very old,
since it is found in Hume and Locke, as also in several of
our old economists; but like almost all other fundamental
monetary theorems, it was developed in its minutest details,
and demonstrated, by Eicardo, and constitutes one of his
many splendid contributions to the science of economics. It
is commonly known as the quantitative theory of money, or
the quantitative principle?
§ 5. That Money may be a Commodity destitute of all
direct Utility
Supposing the currency of a country to consist of a sub-
stance which is at the same time a direct commodity, for
instance, gold, which possesses industrial utility, it may be
deprived of all directly useful properties, — that is, in the case
of a gold currency, the coinage may be debased, — without its
in any way affecting prices.
This is demonstrated by Eicardo in the following
manner: Suppose that for the circulation of a close market
one million coins are required, each containing one hundred
grains of pure gold. In that case, 100,000,000 grains of
pure gold are in circulation as money ; and prices will rule
at a determinate level, according to the demand there is for
1 S. Piperno, Elementi di scienza economica, p. 194, Rome, Paravia, 1878.
2 Ricardo's Principles, chap. xiii. p. 107, M'Culloch's edition. The best
recent work on the subject is A. de Viti de Marco's Moneta e prezzi, ossia il
principio quantitative in rapporto alia questione monetaria, Lapi, Citta di
Castello, 1885.
232 GENERAL THEORY OF VALUE PART in
money and the need that exists for exchanges in specie.
Now, let the sovereign abstract one grain of gold from each
coin, withdrawing it from the market ; there will then be in
circulation 1,000,000 coins, each containing ninety-nine grains
of gold, that is, 99,000,000 grains of gold. But the demand
for currency, and the quantity of money in circulation being
the same as before, the unitary value of the coinage will
remain unaltered. But this process may be carried further,
ten grains of gold being deducted from each coin and with-
drawn from the market, the total number of coins remaining
the same ; in which case the unitary value of the coinage will
remain unaltered, its factors not being altered. If, on the
other hand, the ten grains of gold taken from each coin, that
is, the 10,000,000 grains of gold, are coined and put on the
market, there will be a fall in value.
Hence Eicardo's theorem, that however debased a coinage
may become, it will preserve its mint value, provided it be not
in too great abundance.1 Hence too the principle, that if the
State alone can coin, there can be no limit to the debasing of
the coinage, i.e. to the charge for seigniorage, which it may
impose, provided it limit the quantity of the coinage.2 Paper
money affords an instance of a currency the intrinsic value of
which is reduced to zero.3
1 Ricardo's Reply to Mr. Bosanquet's Practiced Observations on the Report oj
the Bullion Committee, chap. vi. p. 347 of M'Culloch's ed. of Ricardo's Works.
2 Ricardo's Principles, chap, xxvii. p. 213 in M'Culloch's edition.
3 Eod. loco. Walker, Money, part i. chap. ix. p. 164 ; part ii. chap. xiv. p.
275 ; chap. xvii. p. 376. In order to have a system of paper money, or even a
monetary system without money, that is, consisting solely in the registration of
credits and debts in a central bank, the intervention of the State is unnecessary.
The State has only been introduced in order to facilitate the comprehension of
the theory, by postulating a power which will ensure the paper being known and
accepted by all. How the State may be dispensed with, appears from the
following reflections of Spencer: "The monetary arrangements of any com-
munity are ultimately dependent, like most of its other arrangements, on
the morality of its members. Amongst a people altogether dishonest, every
mercantile transaction must be effected in coin or goods ; for promises to
pay cannot circulate at all, where, by the hypothesis, there is no probability
that they will be redeemed. Conversely amongst perfectly honest people
paper alone will form the circulating medium, seeing that as no one of such
will promise to pay more than his assets will cover, there can exist no hesitation
to receive promises to pay in all cases," etc. — Social Statics, 1841, Chapman,
chap. xxix. § 1, p. 396, 397.
CHAP, ii OF THE VALUE OF MONEY 233
§ 6. Of Gresham's Law
Supposing money to be made of a metal, such as gold or
silver, which is endowed with direct usefulness, and supposing
that there are in circulation coins of lower standard along
with coins of superior fineness, it follows from what has been
stated, that both these varieties can circulate concurrently,
provided that the quantity of the coinage le so limited as to
preserve its mint value. But if the coinage is at all in excess
of the demand, the lad money drives out the good money ; for
the latter will be hoarded up rather than the former, and will
moreover be used exclusively in international payments, in
which foreign money is only accepted in respect of its fineness ;
in addition to which it will be sold as bullion, whenever its
value as such is in excess of its mint value. This phenomenon,
which goes by the name of Sir Thomas Gresham's Law, is
singular, inasmuch as it exhibits the reverse of what happens
in the case of other commodities, the best of which drive
inferior ones out of the market. Gresham's law applies also :
1st, in the case of a metallic currency existing together with
an excessive paper currency ; and 2nd, under a double standard
system, when the relative legal values of the two metals do
not correspond with their relative market values, and the
mint is open to all comers.1
§ 7. Of the International Distribution of Money
Supposing two absolutely close markets, both however
using the same currency, prices will have a determinate level
in either market, dependent, as we are aware, on the volume
of business which it is found convenient to transact in money,
and on the quantity, and rapidity of circulation, of the money
available. Supposing now, that these markets are placed in
communication, and that prices rule much higher in the one
than, in the other, owing to the existence there of a larger dis-
posable quantity of money, or of a greater rapidity of circula-
tion, or of a less demand for money. On this hypothesis, a
given quantity of commodity will have a greater power of
1 Jevons, Money, pp. 80-85.
234 GENERAL THEORY OF VALUE PART in
exchange in money, in the country where prices are high,
than in that where they are low ; and it will be profitable
to bring goods from the latter to the former, and money
from the former to the latter. In other words, the
export of commodities from the low-priced market will in-
crease,— for consumers in the high-priced market will direct
their demand to that quarter, offering money in payment, —
and, on the other hand, the imports will dimmish, for the
consumers in the low-priced market, who possibly found it
profitable before to purchase abroad, will now be disposed to
buy at home. And vice versa, the export of commodities
from the high-priced market will cease, because foreign con-
sumers will withdraw from it, and the imports will increase,
because consumers in that market who previously purchased
at home, will now find it more advantageous to buy abroad.
There will therefore be an influx of money into the market
where prices are low from the one where they are high, which
will continue until the increased amount of money in the first,
by causing a rise of prices, and the diminished amount of
money in the second, by causing a fall of prices, have brought
about a uniform level of prices in both markets.1 This pheno-
menon is expressed in another Eicardian theorem, viz. that
the amount of the currency is regulated in each country by its
value.2 This implies that free trade between two markets —
or countries — cannot deprive either of its stock of money,3 or
in other words, that there cannot be a constant flow of money
from one market to another.4
1 If this process assumes large dimensions, it produces a form of commercial
crisis, which however no artificial means can obviate.
2 Ricardo's Reply, etc., chap. iii. § 2, p. 326 ; J. S. Mill's Principles, pp.
306, 307.
3 This effect can only be produced by the law of Gresham.
4 A constant flow presupposes that money is the commodity which the export-
ing country produces at the least comparative cost. This may be the case : (a)
if a country has mines of the metal used as currency, and (6) if it obtains the
metallic money from other countries by means of exchanges at a less comparative
cost than the countries which import it. In a country which imports con-
tinuously, there must be a constant industrial consumption of the metallic
money.
CHAP, ii OF THE VALUE OF MONEY 235
§ 8. Of Discount in Relation to the Value of Money
Of money, as of any other commodity, the mere use may
be purchased for a determinate time, in other words, money
may be obtained on loan, just as a house or farm may be
taken on lease, or a labourer's services may be hired. The
price payable for the use of a sum of money for a certain time,
is called usury or discount. The purchaser of the use of a
sum of money must, since he decides to purchase, attribute a
certain final degree of utility to the sum he demands, and this
will mark the maximum price he is willing to pay. The
vendor of the use of money will compare the final degree of
utility that the power to dispose of the money has for him at
present, with the smaller final degree of utility he attributes,
also at present (see part i. chap. iv. § 6), to an equal amount of
money which will only be available in future, with a certain
degree of probability.1
This holds good in the supposed case of only two in-
dividuals ; if however there are many lenders and borrowers,
the problem is complicated in accordance with the laws and
sub-laws already expounded.
Discount and value of money are thus different species of
the same genus, for the second represents the price of the use
of money for an indefinite period, and the first represents the
price of the use of money for a definite period ; so that the
one might, by an indefinite series of gradations, pass into the
other.
The affinity between discount and value of money is
exhibited likewise in their tendency to vary concurrently in the
1 e.g. a purchaser of the use of money gives a banker a promise to pay
£100 at the end of the year, and receives £95 in cash. The discount in this case
is said to be five per cent, such being the established custom in commerce ; but
the price actually paid by the debtor at maturity, i.e. on the day when he pays his
bill, is £5 on £95, or 5 '263263 per cent. The debtor who asked for the money
was willing to pay a maximum of, say, ten per cent, as he presently needed an
instrument of exchange, and the sum he was willing to pay the lender, viz. ten
per cent on the loan, is the measure of the final degree of utility the money
possessed for him. The creditor substitutes for the £100 present in his hands,
£100 promised him a year hence, and he estimates the difference between the
respective final degrees of utility of these two values as equal to the final degree
of utility of at least, say, two per cent on the sum lent. Hence the requisite
conditions for an exchange.
236 GENERAL THEORY OF VALUE PART in
same direction in four exceptional cases, and to vary concurrently
in an opposite direction in all other cases.
The following are the cases in which discount and value
of money vary in the same direction : —
1st. Let us call price of the bill the sum of money paid for
it by the purchaser (the banker), amount of the bill the sum
expressed on the face of it as due from the party who sells it,
and discount the difference between price and amount. Then,
the higher the price, the greater the discount, and the higher
the price of a bill, the smaller is the discount. But the
lower the price, the higher is the value of money, i.e. its pur-
chasing power in respect of bills.1 Therefore : the value of
money varies inversely as the variations in the price of bills,
and directly as the variations of discount (M'Leod's theorem).
2nd. As money is employed not merely in purchasing
direct commodities of single productiveness, but is also
frequently borrowed for the express purpose of purchasing
direct commodities of manifold productiveness, as also in-
strumental commodities (such as houses, lands, etc.), and above
all, shares, bonds, and stocks, it happens that in the largest
money markets, which are also the largest markets for such
securities, a fall in the rate of discount, by increasing the
amount of disposable money, is concurrent with a rise in price
loth of these commodities of manifold productiveness and of
instrumental commodities, for it gives rise to a greater demand
for them. Hence a fall in the rate of discount is accompanied
by a rise in price of certain commodities, i.e. by a fall in the
value of money with respect to such commodities. And vice
versa, if the rate of discount rises, the holders of shares, bonds,
stock, and other interest-bearing securities will find it pro-
fitable to employ their money in discounting bills rather than
in holding the former. Hence sales will take place, with the
result of sending down the prices of securities and increasing
the purchasing power (value) of money with respect to them.2
3rd. If, owing to whatever cause, there be a large and
sudden demand for money, those who need money will be
obliged to sell any kind of commodities they possess, thereby
sending down the prices of direct and instrumental com-
1 Macleod, op. dt. p. 214.
2 Clement Juglar, Du change, etc., Guillaumin, Paris, 1868, vii. p. 232.
CHAP, ii OF THE VALUE OF MONEY 237
modities. At the same time the rate of discount will rise,
owing to the increased demand and diminished supply of
money.1 Therefore again : the rate of discount varies directly
as the value of money, and inversely as price.
4th. A sudden influx of money will provisionally and
temporarily facilitate discounts, and the increased amount of
these will gradually send up prices, i.e. will diminish the pur-
chasing power of money, bringing it down to a new level. The
opposite effect will result from the .efflux of money in any con-
siderable quantity.2
But that these four cases are exceptional, and that, as a
general rule, the rate of discount and the value of money
vary inversely, is shown by the fact, that, as a rule, bills are
chiefly discounted by contractors for the purpose of paying for
the materials and labour employed in industrial undertakings,
and that consequently an increase in the demand for discounts
arises from an increase of purchases made or projected. Hence
a rise in the rate of discount is concurrent with a rise
in price of large classes of goods, i.e. with a fall in the
value of money. Vice versa, when the demand for discounts is
weak, and the discount rate is consequently low, this is
ordinarily due to the scarcity of business, and coincides with
low prices, i.e. with a comparatively high value of money.
This theorem is thus formulated by De Viti de Marco : The
curve of the fluctuations of the rate of discount does not
coincide with the curve of the fluctuations of this or that
commodity, but with the curve of the general mean of the
fluctuations that occur in the prices of the principal articles
of commerce ; 3 which means that it is the converse of the
curve of the mean value of money.
1 This phenomenon, when it assumes large proportions, constitutes a form
of monetary crisis. Clement Juglar, Enquetes sur Us principes et Us fails
generaux qui r4.gisse.nt la, circulation monetaire, et fiduciare, Question 15e, pp.
20-24, Paris, Impr. Imp. 1867.
2 For theorems 2 to 4 see Sidgwick, op. cit. ii. 5, § 5, p. 264. The first might
be comprised in one formula with the second, and the third with the fourth.
Thus we should have, as the general rule, the varjdng of the rate of discount
inversely as the value of money, and two exceptional cases. See ante, part i.
chap. ii. § 2.
3 De Viti de Marco, op. cit. p. 97, in which a minute inductive demonstration-
of this theorem is given.
238 GENERAL THEORY OF VALUE PART in
§ 9. Of the Cost of Metallic Money
When the substance of which money is made is a direct
commodity, or an instrumental commodity productive of direct
commodities, — such as precious metals, grain, etc. — money
involves a certain cost. This cost is a dead loss for the
nation using such currency, and the loss can only be minimised
by using the least possible amount of money and increasing to
the utmost extent the rapidity of its circulation. The law
which determines the cost of money was first propounded by
Senior and again by Cairnes.1
If a country contains mines of the precious metal used for
its currency, the cost of the latter is determined by the pro-
ductiveness of the mines and the efficiency of the labour
expended on them. If, on the other hand, it does not possess
such mines, the cost of its money is determined by the efficiency
of its labour in producing those wares which exchange in the
most favourable ratio against the metal in the countries which
yield it, i.e. those wares which bear the highest value there ;
or by the efficiency of its labour in producing those wares
which exchange, in the most favourable ratio, against the
precious metal, in countries which have themselves purchased
it from those where it is produced. Hence this important
proposition with reference to the theory of wages, that where
the cost of obtaining money is low, nominal salaries are high,
and vice versa.
Metallic money, however, costs, not only to obtain, but also
to keep and transport it. The safe custody of money has not
yet been made the subject of an economic law, but its transport
has, as we shall see in the next paragraph.
1 Senior, Three Lectures on the Cost of obtaining Money ; Cairnes, Essays in
Political Economy, Theoretical and Applied, 1873, p. 92: "Where a country
does not itself yield gold or silver, every increase of its metallic circulation
must be obtained — can only be obtained— by parting with certain elements of
real wealth — elements which, but for this necessity, might be made conducive
to its wellbeing. It is in enabling a nation to reduce within the narrowest
limits this improductive portion of its stock, that the chief advantage of a good
banking system consists ; and if the augmentation of the metallic currency of
a country be not an evil, then it is difficult to see in what way the institution of
banks is a good."
CHAP, ii OF THE VALUE OF MONEY 239
§ 10. Of the Value of Instruments of Credit functioning
as Money
A variety of instruments of credit supply the place of
money, inasmuch as they perform the functions of a medium
of exchange : those namely which certify that the holder is
entitled to receive a certain amount of whatever thing is money
in a given market, from a certain person, at a specified time.
Amongst such instruments must be ranked in the first place a
bank note, i.e. a promise in writing by a bank to pay on
demand a certain sum of money to the bearer of the promissory
instrument, i.e. of the note. Such too is a cheque, i.e. an order
in writing addressed by a creditor to a bank, requiring the latter
to pay a certain sum of money to, or to the order of, a specified
person ; as also a promissory note, or promise in writing to
pay a certain sum of money at a given time and place, to
a person specified expressly or implicitly ; and a bill of
exchange or order in writing addressed by one person to
another, requiring the person to whom it is addressed to do
the like.
These instruments of credit are not money, though they are
used as a medium of exchange, which is the characteristic
function of money ; for they only perform that function in so
far as something else exists which is accepted as money, i.e. they
presuppose the existence of a recognised medium of exchange, to
which they refer. Hence the question of their value calls for
separate treatment. The difference between them and money
does not by any means consist in the fact that the latter, in
civilised communities, is made of a substance (such as a precious
metal) which is a direct commodity as well as an instrumental
commodity for other than monetary purposes ; — for that might
even not be the case, and the currency might be a legal paper
currency, or a purely fiduciary paper currency issued by a
bank or a private person, — but in the fact that those in-
struments are not intended by the parties to be given or
taken save as promises to give or accept whatever medium
of exchange is, for the time being, at a certain place, recog-
nised as money, and is so designated. The very wording
240 GENERAL THEORY OF VALUE PART in
of the instrument recognises, and refers to, something else as
money.
As regards the value of a promise to pay money, the first
thing to be taken into account is the degree of certainty as to
its being kept. This, though a most important element in
the value of such instruments in practical life, is non-existent
in pure economics, since it is assumed in that science that all
men are perfectly enlightened (so that no one will promise to
pay what he is not sure of being able to pay, and no one will
allow himself to be deceived by an unsubstantial promise), and
perfectly honest through egoism (so that no one will make illusory
promises). But if we can abstract from the question of the
goodness of an instrument of credit and, a fortiori, from that of
its genuineness, we must nevertheless distinguish between such
as contain promises of immediate payment and such as contain
promises of deferred payment, i.e. payment at a future date ;
for these must, cceteris paribus, be affected by a coefficient of
deterioration (part i. chap. iv. § 6). Supposing this difference
to have been taken into account, and that accordingly we have
only to do with promises to pay at sight, or promises to pay
at a future date reduced to an equality of comparison with
those at sight, it is clear that the value of an instrument
of credit cannot be less than that of the money it replaces ;
for were that the case, the holder would present it for payment.
Nor on the other hand, save for its greater convenience
in comparison with money, as regards safe custody, and
still more as regards transport, in cases where money
consists of some heavy or perishable substance, can an
instrument of credit be worth more than the sum promised, or
required, to be paid by it. But, as a matter of fact, the value
of money itself comes to be affected by the use, on a large
scale, of instruments of credit as a circulating medium, because
the demand for money, i.e. the amount of business transacted
in money, is thereby reduced. Hence the law of the value of
instruments of credit comes to be : that every such instrument is
worth as much as the money for which it is substituted, and whose
value it has reduced below the level it would attain, if no instru-
ments of credit were in circulation as a medium of exchange.
Where money consists of a cumbrous substance, as is the case
in all civilised countries that have a metallic currency, instru-
CHAP, ii OF THE VALUE OF MONEY 241
ments of credit payable in another market l than the one where
they are drawn, i.e. drafts, may be worth more or less than
their face value, and the difference is termed the exchange.
The following are the cause and limits of this difference. A
draft is an acknowledgment of the debt due to the drawer, who
lives in one place, by the acceptor, who lives in another ; and
the consideration for the debt usually consists of goods sent
by the drawer. Supposing that, in a given market, there is a
merchant A, to whom a certain sum is due from another mer-
chant B, residing in another market ; and that there is, at the
same time, in this second market, a merchant C, to whom the
same amount is due from another merchant, D, residing in the
first market, B would then have to send money from the second
market to A, in the first, and D would have to send an equal
sum of money from the first market to the second. This
would entail expense on both B and D, in the shape of freight
of a heavy commodity and insurance ; which may be obviated
if D purchases in the first market A's draft on B, thus ex-
tinguishing B's debt to A, and transmits it to C in the second
market, in satisfaction of his own debt, since C can there
obtain payment from B. It is evident therefore that, in the
first market, persons owing money in the second will find it
advantageous to purchase bills on the latter, paying even more
for them than the sum they transfer, which is called the par
of exchange, up to a limit at which it would be equally to their
interest to submit to the cost of transporting money ; and
the same applies to the debtors in the second market. Hence
the maximum limit, in this respect, of the exchange on a bill
is given by the cost of transmitting an equal sum in specie,
and is termed the maximum gold point of the bill. On the
other hand, it is to the interest of creditors in every market to
get rid of their bills, for if they failed to find purchasers for
them, — i.e. the said remitters or drawees, — they would have to
wait until their debtors sent them their money, in which case
they would be subject to a discount in proportion to the time
required for this operation. Hence the minimum limit, in this
respect, of the exchange on a bill is again given by the cost of
receiving an equal sum in specie, which is called the minimum
1 Owing to this fact alone and to other causes not contemplated in our
hypotheses.
B
242 GENERAL THEORY OF VALUE PART m
gold point of the bill. This theorem is probably due first and
foremost to Macleod.1 It must be observed that these two
limits are not identical, as the expenses the debtor is liable to
are not necessarily equal to the discount submitted to by the
creditor. "Within these limits — abstracting from other causes
which may overrule them — the rate of exchange is determined
by the demand and supply of bills.
1 Macleod, TJie Principles of Economic Philosophy, p. 298 ; Theory and
Practice of Banking, chap. vii. § 6 ; Goschen, The Theory of the Foreign
Exchanges, chap. iv. p. 45.
CHAPTER HI
OF THE VALUE OF CAPITAL
§ 1. Definition of Capital and Interest
IT is a fundamental fact for various economic doctrines, that
an aggregate of direct or immediate commodities must always
precede the existence of men ; and that this aggregate which is
required for the sustenance of the population can only be
obtained as the gift of nature, i.e. as a condition of fact of the
environment, or as the result of the savings of men belonging to
an earlier generation ; so that ultimately the existence of men
presupposes the antecedent existence of direct commodities as
constituent elements of the environment} Now the direct
1 This theorem, which appears to be absolutely axiomatic, is far from
being known and recognised by many recent economists ; and for this and
other reasons it seems expedient to quote the demonstration of it given by
Ortes : "As the substance of which man is formed precedes the fashioning
of his frame, so the goods that preserve it must precede its preservation.
A man is not conceived and shaped in his mother's womb before the goods
exist which, by yielding sustenance to his parents, impart it, through them,
to him. He does not issue to the light of day until the milk that is to
nourish him fills the maternal breasts, nor until the clothes that are to en-
wrap him and the cradle he is to lie in are somehow provided. In a word,
everything that ministers to his subsistence precedes the use he makes of it
in order to subsist amongst his fellow-men. And what is predicated of the
earliest age and of an individual, applies equally to all ages and to all men ;
so that no man exists before the commodities that support his existence, just
as no building is erected before there are materials for its construction.
These commodities, which in the solitary and savage state, would be herbs
and fruits, or at most milk and the spoils of the chase, in the social and
national state are food, clothes, and dwellings, varying with the different
circumstances of individuals ; that is to say, they are products qualified for use
by selection and modification, distribution and management, in conformity with
244 GENERAL THEORY OF VALUE PART in
commodities which supply the immediate wants of men whilst
they are engaged in the preparation of other commodities.
whether direct or instrumental, are termed Capital, in accord-
ance with the definition given by Ortes ; 1 and this equally in
isolated and social economics. In other words, all human
labour presupposes the availability of a fund of direct com-
modities, i.e. of capital, supplied sometimes by the conditions
of the environment, sometimes by savings of the fruits of
previous labour intended for the satisfaction of the direct
wants of the worker during his labour.
Capital is not therefore a species per se of direct com-
the requirements of this state, and prior to them it will consequently be
impossible for even a single member of the nation to exist. If in the island
already referred to (book i. chap, ii.) the first inhabitants had not found
ready to hand products supplied spontaneously by the soil ; if the second
generation had not found such products gathered by the first; if the third
generation had not found such products gathered and modified by the first
and second generations ; and if the fourth generation had not found such
products gathered and modified by the three former ones, no one would have
migrated to the island, and it would not have become the seat of a nation. "-
Ortes, Delia economic*, nazionale, book i. chap. xx. p. 118, Ediz. Custodi, vol.
xxi. Confer Thorold Rogers, Manual of Political Economy, 3rd ed. pp. 74, 156 :
" The supply of food is a condition precedent, as lawyers say, to the growth
of population itself." J. L. Shad well, A System of Political Economy, book i.
p. 47, book ii. p. 196 ; Macleod, op. cit. vol. i. p. 231 ; Giddings, The Theory
of Interest, Quarterly Journal of Economics, January 1880.
1 ' ' For this reason, what we have repeatedly stated must be borne in mind,
viz. that commodities must precede population, and that no one can engage
in any employment, save in reliance on commodities possessed by some one
else, and to which he becomes entitled in consideration of his labour (i. 17).
And since it is certainly impossible to engage in any employment without
consuming commodities whilst so engaged, and as these commodities cannot be
the ones that are being brought into existence by the employment, there must
necessarily be other and pre-existent commodities which can be consumed by
the persons occupied whilst they are gathering and qualifying the former.
. . . Now these commodities, which precede present employments, but which are
the result of employments carried on during all past time, I call NATIONAL
CAPITAL ; so that supposing all present employments to cease, all the com-
modities gathered, modified and distributed, as the result of past employments,
and possessed more or less by all individuals throughout the nation, must be
considered as capital belonging to them and on which the nation is then sub-
sisting. Moreover, since this capital is being steadily consumed day by day
by the population and by the wasting effects of time, in order that i;.-
amount may be kept up, it must, all other conditions being the same,
be made good by the produce of daily labour to the same extent to
which it is being wasted and consumed ; otherwise, being diminished littli- 1-y
little, it would altogether disappear, and no commodities would remain on which
CHAP, in OF THE VALUE OF CAPITAL 245
modities, but merely these commodities employed in a certain
manner, i.e. with a certain object ; and under a monetary
system, or better still under a perfect system of divided labour,
and consequently of exchange, every aggregate of riches, being
exchangeable against direct commodities (to be employed in
the maintenance of labourers), may be deemed the equivalent
of a capital, the amount of which will be determined by the
then rate of interchange between direct and instrumental com-
modities. Thus money, land, bonds, and anything else having
an exchange value may be expressed in terms of the quantity
of capital that may be bought with them.1
the nation could subsist, or in reliance on which any one could engage in any
employment. That portion of this capital which is thus being consumed and
replaced by the present every-day employments, I call the national rent of
commodities, which considered with reference to any definite period, say one
year, will be called annual rent," Ortes's definition of capital is incidentally
the same as Adam Smith's, tome ii. book iv. chap. ii. p. 32, and the
characteristics he attributes to it have passed into classical economics under
the names of J. S. Mill's fundamental proposition respecting capital, viz. that
"industry is limited by capital," Principles of ^Political Economy, pp. 1-3 and
39-43 ; and also into a theorem formulated by J. S. Mill, viz. that "demand for
commodities is not demand for labour," eod. loco, pp. 49-55. Jevons, op. cit.
p. 243, defines capital precisely as Ortes does : ' ' The current means of sus-
tenance constitute capital in its free or uninvested form."
1 Capital, in its genuine form of means for satisfying the primary wants of
labourers, whose work will only produce at a future date a commodity of immedi-
ate utility, is of a comparatively perishable nature, even through the mere effect
of time. This circumstance is a matter of fact, which from an economic point of
view, is not a necessity, or rather which is occasioned by the fact of our direct
wants being what they are, and the things that satisfy them being endowed with
physico-chemical properties that cause them to decompose rapidly. In primitive
civilisations the only existing method of accumulation is material, that is, it con-
sists of hoards of food and of other immediate commodities such as are gathered
by many species of animals (S. Cognetti de Martiis, Le forme primitive nella
cvoluzione economica, Torino, Loescher, 1881,^assi'w, spec. p. 74). Soon however
the hoards of immediate commodities are replaced by hoards of instrumental
commodities endowed with more durable physico-chemical properties ; thus e.g.
flour is substituted for bread. At length, in the highest economy of exchange,
capital is accumulated in the most durable form of instrumental commodities,
viz. money, and better still of debts pure and simple owed by private individuals
or collective bodies of individuals (companies, etc.), or the State ; and for the
purpose of preservation, those instrumental commodities are chosen which are
least perishable, and the sale of which can always be counted on at not unfavour-
able ratios of exchange. Under both these aspects, in civilised communities, debts
must appear incomparably superior to all other instrumental commodities, because
their material substance consists of a complex of things not easily affected by
physico-chemical forces (paper bearing certain marks, both renewable at pleasure),
and of habits and acts on which our knowledge of the character of the members
246 GENERAL THEORY OF VALUE PART in
Since capital consists of direct commodities employed in
the sustenance of labourers whose work can only fructify after
a certain lapse of time, and who yet experience wants whilst
they are working, it is evident that the direct commodities
which can be capital are those only which are regarded as such
by the workmen. In fact, in defining commodities in general,
we saw that we must only rank things as such, with respect to
a certain consumer having certain wants (part i. ch. iv. § 2 D).
And in this case, the consumers of the commodities being
those who perform some work, we shall find that, according
to their nature and their wants, certain things will to them be
direct commodities, and others not, and of such direct commo-
dities, only such portion will le CAPITAL as is, or may le, placed
at their disposal. This portion may increase or diminish,
according as the amount drawn from the fund of direct com-
modities existing at a given moment, and placed at the workers'
disposal, is larger or smaller, and according as the workers'
opinion as to what is a direct commodity varies from time to
time and place to place ; * and also according as the quantity
of the community enables us to count with certainty ; as, for instance, the honesty
of debtors, the honesty of the public which would punish a failure, the integrity
of judges, the intention of members of the community to uphold the laws that
protect property, etc. However we must never forget that those things are only
instrumental commodities, and not capital in the true sense ; things that in
certain environments are susceptible of being transformed into capital, and which
are therefore used as accumulators of capital in those environments, but which
are incapable of accomplishing any productive labour for isolated individuals in
an island, or on a ship, or in a besieged city ; in a word, in whatever condition of
natural economy in which the true and simplest relations of things to our wants
are revealed.
1 Suppose for instance a close market, one half composed'of Italian workmen
of the present day, the other half of Mahometan Arabs. The first will regard as
direct commodities what, according to their notions of comfort, is suitable for the
purpose of eating, drinking, and sleeping ; whilst the second will equally judge .
of such matters in accordance with their notions, and consequently otherwise.
Thus for instance supplies of wine, however excellent in quality, will not be
direct commodities, and still less capital, for the Mahometans, whilst they will
be for the Italians. Moreover both, Jwwever variously, will regard as capital a
number of imaginary positive and negative commodities. Thus for instance, for
the Mahometan, several even primary commodities* (according to Jennings's
classification) will lose the character of direct commodities, should they be con-
taminated by the touch or proximity of a Christian. On the other hand, for
both groups, a quantity of things which perhaps two centuries hence will be
direct commodities, and which possibly abound in the supposed market, are not
direct commodities.
CHAP, in OF THE VALUE OF CAPITAL 247
of direct commodities that are produced and saved,1 or of those
spontaneously afforded by the environment, may happen to
vary.
The term, interest on capital, is applied equally to the rent
paid by a person who borrows capital to the lender, and to the net
profit derived from capital by the owner who employs it him-
self; it is the value of the use of a capital for a determinate
period, and will therefore vary directly as the amount of the
capital lent, if the period for which the loan is made is fixed
(or as the amount of capital employed, if the period during
which it is so employed is fixed) ; or directly as the period for
which the loan is made, if the amount of the capital is fixed.
The idea of a rate of interest always implies a given period,
usually a year ; so that if we say that the rate of interest is
5 per cent, we mean that the interest which a borrower pays
in one YEAR for the capital lent to him, is to the capital as
5 to 100. If the capital lent is 100 and the rent 20, the
annual rate of interest is 20 per cent, but it would amount to
240 if 20 were payable monthly, and to 1040 per cent if that
rent were payable weekly.2
1 In our civilised communities, and for a long time past, saving, i.e. abstin-
ence from the immediate consumption of riches found or produced, together
with the subsequent productive employment of savings, has been in such a
marked degree the prevalent cause of the formation of capital, that it may be
regarded as the only cause of practical importance. But it is neither theoretically
nor historically the only origin of capital. See Bagehot, Economic Studies (The
Growth of Capital), pp. 161-181. Moreover the desire of possessing capital is not
psychologically the primordial cause of saving. To put it briefly, people save :
(a) in order to insure against future pains they foresee (old age, illness, etc.), and
the fund thus created is not capital ; (&) from tribal egoism, i.e. to insure those
belonging to them against future ills they foresee (e.g. to provide for their
children), and the fund thus constituted is not capital ; (c) to reduce the cost of
production, or to gain the interest, and the fund thus constituted, and used for
this purpose, is real capital. This is the genetic order of the motives that induce
people to save, and the relative weight of the motives is also indicated by it.
2 Macleod, op. cit. vol. ii. p. 35.
Saving is a form of labour. " En realite, 1'epargne est le travail intellectuel
et moral qui conserve les capitaux sous toutes les formes et dans tous les details
de 1'industrie, aussi bien ceux qui vont etre consommes dans le plus prochain
repas, que ceux qui doivent etre conserves pendant le plus long temps. . . .
Avec le systeme d'exposition employe jusqu'ici, on ne peut guere se dispenser de
prendre la propriete comme un postulat, ainsi que 1'a fait franchement J. B.
Say. . . . Dans notre systeme d'exposition, cette difficulte n'existe pas. II
suffit, pour 1'ecarter, d'une simple hypothese, celle de la suppression de la pro-
priete. Plus de proprietaires, ou plutot un seul proprietaire, 1'idole iStat, le
248 GENERAL THEORY OF VALUE PART in
It follows from these considerations, that the amount of
investment of capital is the product of the quantity of
capital invested, of its remuneration per unit of time, and
of the number of units of time for which it is invested.
A sum invested for two years is equivalent to twice that
sum invested for one year only. But ordinarily a quantity
of capital is invested progressively, i.e. the various portions
thereof remain invested for decreasing periods. If, for instance,
a workman has to be maintained for a year, in order that a
piece of work may be done, a first portion of capital paid to
him the first day remains invested for 364 days, a second
portion, paid to him the day following, remains invested for
363 days, and so on, until the last portion, which will only be
paid the last day and thus be invested for one day.1 It must
further be observed that the portions of capital paid, from
time to time, as wages, are usually invested beforehand in
some other productive shape, such as stocks, deposit receipts,
etc. So that they are only transferred from one investment to
another.
§ 2. Capital — A Complementary -Instrumental Commodity
Capital is, as we have said, an aggregate of direct com-
modities employed in the maintenance of workers. Now, what
is the service it renders ? It is at once obvious that the direct
commodities which are employed as capital, belong to that large
class which have at least two distinct final degrees of utility,
viz. a first degree due to the fact that they are commodities
communisme. Que vont devenir les approvisionnements qui remplissent les
magasins actuels, le pain, le vin, les comestibles de toutes sortes, les vetements,
les tissus, les chaussures ? Les laissera-t-on au premier occupant, au pillage ?
Non, sans doute. On les remettra aux soins de fonctionnaires publics charges
de les garder. Que feront ces gardes ? Exactement ce que font actuellement
les proprietaires : il faudra les payer, comme on paie les proprietaires, et ils ne
fourniront pas plus de travail musculaire que n'en fournissent aujourd'liui 1. s
proprietaires. En faisant cette hypothese, on ne peut plus meconnaitre la
fonction du propri6taire, et la grande discussion se roduit a savoir sous le quel
des deux regimes elle sera le mieux remplie et cofttera moms." Journal des
jZconomistcs, 1890, Juin, pp. 358, 359. Courcelle Seneuil, L'Epargne est un
Travail.
1 Jevons, op. cit. p. 249. How such problems are worked out is explained in
any manual of political arithmetic. See e.g. Paolini's Aritmctica socialc, Rome,
Botta, 1880.
CHAP, in OF THE VALUE OF CAPITAL 249
capable of affording to any one a given sum of immediate
satisfactions ; in other words, direct commodities ; and a second
degree due to the special use they are put to, as capital.
Now, for the reasons explained above (part. i. chap. iv. §5),
it is certain that a fund of immediate commodities will not be
used as capital, unless, in the estimation of their owner, they
possess in this form a higher final degree of utility than in the
other. Supposing an isolated economy, it is obvious that a man
who is obliged to work for his living will be guided, in deter-
mining the amount of work he is to undertake, by the theorem
of Gossen, or Jennings, or Jevons of the equivalence of positive
or negative degrees of 'utility (part i. chap. iv. § 10). Now
so long as he is unaware of any other uses of direct com-
modities than such as satisfy immediately his primary and
secondary wants, he will work just as long as is necessary,
given the conditions of his environment, to realise this object.
This does not exclude the possibility of his saving, and of his
abstaining from the immediate consumption of his stock,1 in
consideration of his future wants, i.e. with a view to insuring
himself against future pains, but it excludes the idea of this
stock being capital. If however he becomes aware of the fact
that the cost of production of the fruits of his daily labour
would be greatly reduced if his labour were combined with an
instrumental and complementary commodity (say a tool, a
machine, raw material, etc.), and that this instrumental com-
modity, though not supplied by nature, may be produced by
his labour, he will perceive that the condition sine qud non of
his producing the desired instrument is the possibility of divert-
ing his labour, for the time being, in whole or in part, from
the employment in which he is engaged in order to apply it to
a new occupation ; and he will also perceive that the condition
precedent of this diversion is the existence of a fund of direct
commodities available for consumption during the time when
his labour will be wholly or partially diverted from procuring
the satisfaction of his immediate wants. The requisite stock
of commodities may be procured by him in various ways ;
according to our hypothesis it is not supplied by nature, for
otherwise his labour would be, pro tanto, an anti-hedonic act ;
consequently to obtain it he may work more whilst consuming
1 The.se are not merely accidental characteristics of the conception "capital."
250 GENERAL THEORY OF VALUE PART m
just as much as formerly,1 i.e. he may save the difference
between his past and present production, which difference will
depend on the efficiency of his labour and the amount of his
habitual consumption, i.e. his mode of life. He may also work
just as much as before, but reduce his consumption, and the
differential product saved will have as the factors of its amount
the same causes ; or again he may work and consume as much
as before, but change the destination of the provision made
against future wants, the amount of which provision is always
determined by the difference between the efficiency of the
labour and the amount of the consumption.
The quantity of capital he requires is determined, both
by the length of time for which he must divert his labour from
the former employment to the new one, and by his mode of life
during that time ; but the duration of this diversion depends
in turn on the efficiency of his labour and the technical character
of the instrumental product he has in view.
The hedonic calculus on the strength of which an isolated
individual will determine to create for himself a capital, or to
use as capital a stock of direct commodities accumulated for
some other purpose, commences therefore with the determination
of the final degree of utility OF THE DIRECT COMMODITIES which
the instrumental commodity to be created by means of his labour
and capital is EXPECTED TO YIELD. The instrumental com-
modity (with the concurrence of labour) will yield direct
commodities in larger quantity at the same cost, or in equal
quantity at a smaller cost, when they are such as could have
been obtained even without it. In most cases, however, the
commodities will be such as cannot be obtained without the
concurrence of the instrumental commodity. Having determined
the final degree of utility of the direct commodities that are
due to the concurrence of the instrumental commodity, we can
determine, in accordance with Wieser's law, the final degree of
utility of the instrumental commodity itself. But the stock
of direct commodities termed capital was a condition sine qud
non of the production of the instrumental commodity, i.e. a
1 If he also consumes more he will never have any capital. For this reason,
and in this sense, Smith says that "saving, more than the efficiency of labour,
creates capital " ; and J. S. Mill explains that, though it may not seem so at
first sight, yet " there is here an increase of saving in the scientific sense." —
J. S. Mill, op. cit. p. 44 ; A. Smith, vol. i. book ii. chap. iii. p. 422.
CHAP, in OF THE VALUE OF CAPITAL 251
necessary factor of its cost of production, the other factor being
the labour. Hence, still in accordance with Wieser's law, the
final degree of utility of capital will depend on that of the
instrumental commodity which capital, as a complementary com-
modity, concurs in producing, and < this final degree of utility
must be greater than that of the stock, considered as a
means of immediate enjoyment. This stock, however, itself
involves a cost, for in no case can a stock exist without its
being the result of extra labour, or of abstinence, or of a
diversion of the fund set apart for insurance against future
pains ; and in order that it may be created and employed as
capital, it is necessary that the homo wconomicus should find
this to be to his advantage, i.e. that he should consider the
profit to be derived from the employment of this stock as
capital (notwithstanding the inferior value of future as com-
pared with present commodities) to be greater than the cost
of its creation, or than the return it would yield if employed
in any other manner.1 Hence is derived Jevons's formula,
according to which the function of capital ultimately consists
in enabling us to tide over the interval between the beginning
and end of the production of an instrumental commodity, or in
enabling us to diminish the cost of production of direct com-
modities by employing a quantity of labour, not immediately
remunerated, in the preparation of instrumental commodities,
i.e. to spend the instrumental commodity produced in advance?
The instrumental commodities, whose production is the proxi-'
mate purpose for which capital is accumulated, cannot be the
product of capital alone. The latter can only remain what it
is — an aggregate of direct commodities — and be consumed ;
but by combining it with labour and using it as a fund for
consumption, or as a provision whilst labouring for some
remoter object, we may by means of it obtain the desired
instrumental commodities. Hence capital and labour act
reciprocally as complementary instrumental commodities, and
their respective degrees of final utility are determined in
1 The measure of the cost will be given by the most useful employment to
which it could be applied, and from which it is diverted in order that it may
be used as capital. We must guard against considering as the cost, the cost of
production of the fund plus the use that might otherwise have been made of it.
This error is exposed by Bohm-Bawerk, op. cit. vol. i. p. 324.
2 Jevons, op. cit. pp. 243-248.
252 GENERAL THEORY OF VALUE PART m
conformity with Gossen's general laws (part i. chap. iv. § 5,
and part iii. chap. i. § 1). The instrumental commodities
which are the proximate result of the combination must not
themselves be regarded as capital, but simply as objects the
preparation of which has cost capital, or in which capital 1ms
been invested.1
§ 3. That the Origin of Interest is not the Difference between
the Value of Present and Prospective Commodities
One is apt to explain the price paid by the person who
borrows capital to the person who lends it, or in other words,
the value of the use of capital, as due exclusively to a
difference between the final degree of utility of present and
that of prospective, commodities. The reasoning on this
subject is somewhat on these lines : It is, or can be, demon-
strated that present commodities have, cceteris paribus, a
greater final degree of utility than prospective commodities
(see part i. chap. iv. § 6) ; but the person who lends
present capital to another, i.e. who sells the use of it to
him for a certain time,2 — or according to others, he who
sells a present commodity on condition of receiving in return,
at a future date, another commodity, — parts with a present
commodity in consideration of his receiving, at a later date,
another commodity whose final degree of utility is affected,
cceteris paribus, by a coefficient of depreciation. Hence he
would not be acting hedonically, if he did not claim a farther
compensation over and above mere restitution, and this com-
pensation is termed interest on capital.
As against this doctrine we have to consider : 1st, That it
assumes as proved the theory,3 that prospective commodities,
1 Jevons, op. cit. p. 264 ; contra Bohm-Bawerk, who denies that direct com-
modities can be both instrumental and capital, op. cit. vol. ii. p. 281.
That a loan of £100 in consideration of the promise of repayment at a future
date is in reality a sale of a present in consideration of a prospective commodity
was demonstrated by Macleod more than twenty-five years ago, and is admitted
by all leading writers on economics, e.g. Sidgwick,book ii. ch. v. § 4, note 2, p. 'JtlO.
I do not, however, know what degree of importance attaches to the question, and
still less what discoveries Bohm-Bawerk lays claim to in connection with this
doctrine and in his controversy on the subject with Kines (Kapitalzins, vol.
ii. p. 301).
3 This is precisely Bolmi-Bawerk's theory (Kapitalzins, vol. ii. p. 258),
CHAP, in OF THE VALUE OF CAPITAL 253
abstracting from their lesser certainty, and other conditions
being equal, are affected by a coefficient of depreciation as
compared with present commodities. This, even if it were the
case, — and for reasons already stated we think it is not,1
—would not explain : 2nd, How it is that the debtor can pay
the interest agreed on, in view of this coefficient of depreciation ;
nor 3rd, What hedonic motive can induce the lender to assent to
the futile transaction of transforming present commodities into
remote commodities plus their interest. In fact, pausing to con-
sider here only the last two difficulties, it is obvious that the
borrower who receives a present commodity and undertakes to
return a greater one at a future date, must know of some
method which will enable him to meet his engagement at
maturity, and he must also know that he cannot avail himself
of this method otherwise than by utilising the present com-
modity he has borrowed. For if he did not know of any such
method, then it would be impossible to understand why he
incurred the liability. But if it be true that these conditions
' ' Die Unsicherheit . . . ein Element, das mit der Zinserscheinung keinen
Zusammenhang hat." Contra, see Walras, Elements d'econ. pure, 2nd ed. p.
xxi. Bohm-Bawerk, ubi supra, declares that the uncertainty of a future event,
as compared with present commodities, is not the cause of depreciation which
furnishes the explanation of interest. (Incidentally, p. 261, he shows that he is
unable to distinguish between a contingency before and after the event.) The
causes to which the difference in value between present and prospective com-
modities is due, are, according to this author, as follows :
1. Difference, as between the present and the future, in the relation between
demand and supply, p. 262.
(a) In the case of persons less well provided now than in the future, p. 262.
(&) In the case of persons better provided now than in the future, p. 263.
(Present commodities are often serviceable also in the future ; future com-
modities are only useful in the future), p. 264.
2. Future pains are estimated more lightly than present pains, p. 266.
(a) Owing to our inability to realise them, p. 268.
(b) Owing to the weakness of our will, p. 268.
(c) Owing to the uncertainty of our life, p. 269.
(d) Owing to the uncertainty of our continued capacity for enjoyment,
p. 269.
3. Owing to technical reasons, present commodities are usually a more
effectual means of production than future commodities, p. 274.
Bbhm-Bawerk charges Jevons and Sax (whom he accuses of being wanting
in independence, and of having adopted Jevons's propositions without having
verified them) with not having understood the function of prospective com-
modities. Confer Jevons, The Theory of Political Economy, 2nd ed. p. 37 ;
Sax, Grundlegung, pp. 178, 314.
1 Ante, part i. chap. iv. § 6.
254 GENERAL THEORY OF VALUE PART in
are necessary to induce a hedonic borrower to contract a loan,
then we must recognise in them the generative cause of interest,
i.e. in the productiveness of capital as a complementary com-
modity in a profitable technical process requiring a certain time
for its completion, but not in the mere lapse of time, which
would leave things as they were. In other words : THE
FUNCTION OF CAPITAL CONSISTS IN AUGMENTING THE NET PRO-
DUCT OF A TECHNICAL PROCESS WHICH REQUIRES AN EXTENDED
PERIOD FOR ITS REALISATION, by making it possible to wait
during this period. As regards the lender, if it is true that a
present commodity has, cccteris paribus, a greater final degree
of utility than a remote commodity, it is impossible that he
can be satisfied to receive mere compensation for the coefficient
of depreciation ; for such modesty would leave him only in the
same condition as before, which would be anti-hedonic, this
transaction being, from his point of view, without consideration.
On the other hand, if his present commodity can be, either for
him or for another person, a complementary commodity for the
production of other commodities, it is clear that whethei he keeps
his capital in order to employ it himself, or whether he lends
it, his remuneration will accrue from his participation, ly means
of his capital, in a profitable technical process ; and his capital
will have a final degree of present utility equal to the final
degree of prospective utility — as at present estimated — of the
direct commodities ultimately due to it. What must not be
lost sight of is, that to the interest thus produced is added a
coefficient of compensation for the depreciation of prospective
commodities, whether such depreciation be attributed to their
uncertainty or to any other cause. But this surplus has
nothing to do with interest properly so called, the two
phenomena being essentially different, as regards their causes,
their amount and the laws of variation to which they are
subject ; for, to put it briefly, interest cannot vary, cceteris
paribus, save in proportion to the productiveness of investments
of capital, and particularly of the last or most recent} This
we now proceed to investigate in detail.
1 In other words, those who allege that present commodities, cccteris paribus%
are worth more than remote commodities, either give a reason for this pheno-
menon, by declaring that the former may serve as complementary or instru-
mental commodities in production, — and in that case the reason given contains
the cause and origin of interest, or else they enunciate what for us is an ultimate
CHAP, in OF THE VALUE OF CAPITAL 255
8 4. Of the Factors that Determine the Hate of Interest
Capital, as appears from what has been stated as to its
nature and functions, is only useful in combination with
labour ; consequently the interest it bears can but be equiva-
lent to the degree of utility the last portion of capital still
available at a given moment possesses for that one of the
borrowers, among whom the entire mass is distributed (and
who intend to use direct commodities in combination with
labour for the purpose of production), for whom its degree
is highest. It is necessary therefore to indicate what are, at
any given moment, the determining factors of the demand for
direct commodities in combination with labour for the purpose
of production, and what are the factors that determine the
supply. In fact it will be remembered that, given the supply
of a commodity and the law of its demand, i.e. the curves
denoting the degree of utility of each portion of the mass of
commodity for each purchaser, the price is a necessary result ;
as, vice versa, if price and mass be given, the law of demand is
fact, and in that case we do not know how the debtor can afford to pay anything
more than the coefficient of equivalence of present and future commodities, nor
what advantage either party can derive from this change of their reciprocal
positions. Bastiat, who is so roughly handled by Bohm-Bawerk, says : " Saving
implies a service performed, and time allowed for an equivalent service to
be rendered in return ; or to put it more generally, it means placing an interval
of time between the service performed and the service received. . . . The lapse
of time that separates the two services exchanged, is itself a matter of arrange-
ment and exchange, for it too has a value. This is the origin and explana-
tion of interest." — Bastiat, Harmonies ficonomiqucs. Bohm-Bawerk says:
"Creditor A gives debtor B a sum of present commodities, say a sum of
present money in full ownership, and debtor B transfers to creditor A an exactly
equivalent, but future, sum of commodities, e.g. a sum of money payable next
year, also in full ownership. A reciprocal transfer is thus effected of amounts
of commodities which, other conditions being equal, are only distinguishable
in this respect : that one belongs to the present, the other to the future. . . .
Now, since, as has been shown above, the subjective estimate of value which
determines the price of present and future commodities is always favourable
to present commodities, the debtor will always purchase the present sum of
money he receives with a larger sum of money to be paid by him, i.e. he will have
to pay an agio, or additional amount ; and this additional amount is interest."
— Bohm-Bawerk, op. cit. vol. ii. p. 300. But wherein do the two doctrines
differ, save perhaps in this, that Bastiat considered that there was a reason
for the fact that the lapse of time has a value ? See in the same sense,
W. Launhardt, part i. § 15, pp. 67-75.
256 GENERAL THEORY OF VALUE PART in
determined ; and if the price and the law of demand be given,
the mass is determined which suffices to meet these conditions
(part ii. chap. ii.). It will likewise be remembered that the
final degree of utility of complementary commodities is deter-
mined in accordance with a subtle law of Gossen respecting
the distribution of an economic effect among the causes tluit
produce it (part iii. chap. i.).
Now, as regards capital, the demand for it, in the case of
the homo ceconomicus, can have no other cause than the actual
or reputed existence of opportunities for its lucrative invest-
ment,1 and hence, apart from error as to the existence of such
opportunities (which cannot occur in the case of an en-
lightened homo ceconomicus, and which, even if it does occur,
disappears in the long run, i.e. in the normal course of any
economic phenomenon), we must hold that, at a given moment,
the demand for capital is equivalent to the opportunities for
lucrative investment.
But what causes determine the demand thus understood ?
Evidently it resolves itself into : (a) the number of opportunities
of investment the productiveness of which is prospective, and
(b) into the quantity of capital that each requires in order to
be developed in the most profitable manner that the state of
the technical arts admits of. But the number of opportunities
for investment depends in turn : (a) on the natural conditions
of the environment, i.e. on the natural resources in so far as
they have not been already exhausted by previous investments
at the moment under consideration ; (/3) on the quantity and
quality of the labour available for combination with capital ;
(7) on the condition, at that time, of technical knowledge, and
(S) on the quantity of disposable capital.
For, passing over the conditions of the environment, whose
influence is obvious, there is no doubt that variations in the
quality and quantity of available labour cause variations in
the opportunities for investment. This is a simple corollary
of the law of definite proportions (part i. chap. iv. § 5),
for only a determinate number of workers, given the quality
of their work, can be combined with a determinate quantity
1 Loans for other than industrial objects, equally with the consumption of
direct commodities for the satisfaction of wants, are neither loans of capital, nor
consumption of capital.
CHAP, in OF THE VALUE OF CAPITAL 257
of capital to produce the maximum degree of efficiency ; and if
their number be given, their quality, which depends princi-
pally on the division and organisation of their labour, —
leaving out of account their physical and psychical qualities,
which are more properly comprised in the conditions of the
environment — has the effect of enhancing or diminishing
their efficiency. Similarly it is obvious, that the inventive
faculty increases the opportunities for investment, whilst the
disposable quantity of capital, at a given moment, is the
maximum limit to the possibility of utilising them, and this,
in turn, is an effect of the law of the definite proportions of
all combinations of complementary commodities.1
But if the demand for capital consists in the opportunities
of investment thus determined, it is their prospective pro-
ductiveness that determines the maximum price that can be
paid for the use of successive increments of capital by a
purchaser, or in other words, the degrees of utility of the
several increments, or the law of demand at a given time and
place. And since for the several portions of a quantity of
capital, as for those of whatever quantity of a homogeneous
commodity, there can only be one price, at a given time and
place, the diverse productiveness of the several portions of
available capital does not determine a diversity in price,2 the
uniform price being that determined by the productiveness of
the last portion of capital that is still employed, i.e. the one
corresponding to the final degree of utility of the available
mass. This is equivalent to saying, that the remuneration
yielded by the latest investments serves to determine the
price of capital in all.3
1 "W. E. Hearn, Plutology, London, Macmillan, 1864, chaps. viii.-xi. pp.
134-199.
2 A lender of capital cannot say to a borrower who wants £3000 : " I know
that £1000 is indispensable to your business, and therefore will charge you 100
per cent interest upon it ; for the second £1000, which is less necessary, I will
charge 20 per cent ; and as upon the third £1000 you can only earn the common
profit, I will only ask 5 per cent." The answer would be, that there are many
people only earning 5 per cent on their capital who would be glad to lend enough
at a small advance of interest ; and it is a matter of indifference who is the
lender. — Jevons, p. 278. See part ii. chap. ii. for a general solution.
3 Jevons, pp. 264-267. P. Leroy-Beaulieu, Essai sur la repartition des
richesscs, etc., Guillaumin, Paris, 1881, chap. viii. pp. 242, 243 : "Les capitaux ne
sont pas egalement productifs dans toutes les societes et dans tous les ages d'une
S
258 GENERAL THEORY OF VALUE PART in
Passing on now to indicate the chief factors of the dis-
posable amount of capital, we may say briefly that, as capital
forms only a portion of the direct commodities possessed by
a nation at a given moment, so every factor that increases
their production or availability must, cccteris paribus, increase
the availability of capital, and vice versd ; and moreover that
the factors which influence the apportionment of the supply
of direct commodities, as between the provision for present
and that for prospective wants, must, cceteris paribus, influence
in the same direction the availability of capital ; and finally
that the factors which determine the distribution of direct com-
modities between the fund constituting merely an insurance
against apprehended future pains (i.e. hoards and every species
of guarantee funds), and the fund intended for reproductive
investment, mark the limits of the amount of disposable
capital.1
meme societe. Ainsi dans une societe naissante, dans une colonie, tin pays neuf,
quand tout est encore a creer, les capitaux, independamment de toute offre et de
toute demande, sont infiniment plus productifs que dans une vieille societe ou la
plupart des reuvres d'une utilite de premier ordre sont acheve"es. De meme
encore dans certaines periodes de la vie sociale, alors qu'on vient de faire et qu'on
applique une grande decouverte transformant les moyens de production et de
communication, les capitauz sont infiniment plus productifs qu'ils n'etaient avant
cette decouverte et qu'ils ne le seront quelques annees apres. . . . Dire que le
taux de 1'interet depend de la productivite moyenne des nouveaux capitaux crees
dans le pays ou survenant dans le pays, c'est e"mettre une proposition a la fois
scientifique et d'une grande importance pratique. . . . Nous disons : la produc-
tivitt moyenne des nouveaux capitaux; en effet, la productivity" moyenne des
anciens capitaux qui sont pour la plupart incorpores en terres, en maisons, en
fabriques, n'exerce plus aucune influence sur le taux de 1'mte'ret : elle contribue
seulement a augmenter ou a diminuer la valeur venale de ces capitaux. C'est
1'abondance ou la rarete des seuls capitaux circulants qui influe sur le taux de
1'interet ; 1'abondance ou la rarete des capitaux fixes n'a pas la meme action."
Sidgwick, op. cit. pp. 283-289, § 4, book ii. chap. vi. "L'interet pour chaque
unite de capital est limite par son utilit^ effective, et celle-ci dans chaque cas est
determinee par 1'importance absolue du capital sous celle de ses formes qui est
la moins necessaire." — J. B. Clark, Revue d'e"con. pol., 4° annoe, No. 3, p. 263.
1 Cairnes thus describes the successive limitations that are necessary to ascer-
tain the amount of disposable capital : "In other words, we find the amount of
AB's investment determined by the following circumstances : First, the amount
of his total means ; secondly, his character and disposition as affected by the
temptation to immediate enjoyment on the one hand, and by the prospect of future
aggrandisement on the other ; thirdly, the opportunities of making profit. "-
Cairnes, Leading Principles, p. 169, part ii. chap. i. § 8. See also Ricca-Salemo,
Sacjgio sulla teoria del capitale, 1877, Milan, Hoepli.
CHAP, in OF THE VALUE OF CAPITAL 259
§ 5. Of the Capitalisation and Uniformity of the Rate of
Interest among Open Markets
Open markets are such as admit of produce and instru-
ments of production passing from one to the other ; in other
words, markets in which producers of the same wares can
compete with one another in prices, reducing them to a level
with cost of production, and in which producers of different
wares can compete with one another as regards profits, propor-
tioning these, in every branch of trade, to the cost of production.
Now it is self-evident that remuneration for the use of capital
cannot but be equal in open markets ; since capital is attracted
wherever it fetches the highest remuneration, with the result
that it lowers the rate of interest in the new investments,
and raises it in those which are relinquished as being less
remunerative. But the fact which deserves to be noted, and
which the formula of the " uniformity of the rate of interest " is
intended implicitly to emphasise, is that, with respect to
capital, there are hardly any other than open markets,1 which
is not the case as regards labour ; for capital is more or less
the same throughout large areas, consisting as it does of
commodities capable of supplying chiefly primary wants,
which are more or less the same throughout a large part of
the world. Moreover it is in the hands of men of business
who realise almost perfectly the type of the homo ceconomicus,
and who therefore know, and take advantage, of every oppor-
tunity that presents itself of earning a profit.
Taken in this sense, the above formula is a law of fact for
the community of civilised nations possessing means of easy
communication and liberal laws.2 It has however a subtler
meaning, inasmuch as it signifies, that the rate of interest is
the same on all investments, estimating their capital value at
what it actually is at the given moment ; in which case it is
a corollary of the law, that the final degree of utility of direct
commodities determines the final degree of utility of the
instrumental commodities from which they are derived. In
1 Cairnes, Leading Principles, pp. 60, 66, and 301 ; Bageliot, Economic
Stvdies, ii. p. 41.
2 See J. S. Mill's Principles, book ii. chap. xv. § 4, pp. 248-251.
260 GENERAL THEORY OF VALUE PART m
this acceptation capital means more especially the instrumental
commodities in which it is invested, particularly so-called
productive commodities, such as land, shares, public stocks,
etc. In fact, what the theorem affirms is, that the market
value of these productive commodities is commensurate with
the income they yield, capitalised at the current rate of
interest. If, for instance, a farm yields a rent of 10, and the
current rate of interest is 5 per cent, its capital value will be
200; if the rate of interest drops to 2 per cent, its capital
value will rise to 500; whilst if it rises to 1 0 per cent, the
capital value falls to 100. If the series of variations of
interest were arranged in the form of an arithmetical series,
the variations of capital value would present that of a
harmonic series, and vice versd.1 But if this is the law of
the value of instrumental productive commodities, — and we
already know that it is so, in accordance with Wieser's law
(part ii. chap. iii. § 4), — it is clear that the rate of interest
must be uniform, because it is a relation between income and
capital value, whilst capital value varies continually, so as to
be nothing but the income capitalised at the current rate of
interest.2
This law of capitalisation presents a grave problem, both
in bookkeeping and in economics, as has been observed by
Professor Sidgwick.3 Suppose a farm yielding a rent of 5, for
which 100 was paid when the current rate of interest was 5
per cent, and that the current rate subsequently varies, decreas-
ing, let us say, to 2^ per cent : in that case the capital value
of the estate rises to 200. Is this an increase of wealth for
the individual, and for the nation in whose favour such varia-
tions of capital value are realised ? It may be said, on the one
hand, that the individual in question can sell half his farm and
yet remain possessed of the same capital value ; and on the other
1 This law was recognised independently by W. Scheibner, Jevons, and
Messedaglia. Vide Drobisch, Mittelgrossen ; Jevons, Investigations, p. 120; and
Messedaglia, Ccdcolo del vcdori medii, Archivio di Statistica, annov. fasc. ii. andiv.
p. 63 of the extract, Rome, Loescher, 1883. The phenomenon is one we have
already touched on in discussing the value of money in relation to the quantity of
commodities it purchases, p. 36 eod. loco, vide part iii. chap. ii. § 4.
2 J. S. Mill, Principles, book iii. chap, xxiii. § 5, p. 393.
3 Subsequently also by many others, c.y. Wieser, Naturlichc Werth, p. 143.
See Sidgwick, op. cit. ii. chap. vi. pp. 273, 274.
CHAP, in OF THE VALUE OF CAPITAL 261
hand, it may be said, that his permanent command of direct
commodities, as indicated by the rent of 5, is unchanged ; so
much so that, although the sale of half his farm leaves him
as before in possession of a capital of 100 in land, it reduces
his rent to 2^, if he consumes the proceeds of the sale. It
is clear that the problem thus presented resolves itself, if
generalised, into this other one, viz. : should variations in the
rate of interest be considered as merely nominal variations of
the capital value of instrumental commodities, or as real
variations in the purchasing power possessed by owners of
productive commodities ? l In the case of companies with a
capital divided into shares, the question assumes special
importance, for if we hold that an increase, or diminution, in
the capital value of a company's productive property, in so far
as it is due to variations in the current rate of interest, has
a merely nominal importance, the dividends must be computed
without taking such increase or diminution into account ;
whereas, if we regard this phenomenon as indicating a change
in the amount of the company's assets, the dividends must
be increased (or diminished) to the full extent of the difference
between the former, and the present, capital value.
§ 6. Of the Tendency of the Rate of Interest to Stability
If we suppose the rate of interest to have attained a certain
level, determined by the law of demand and the amount of
disposable capital at a given time and place, the rate of interest
will tend to remain at that level, notwithstanding slight
changes in the conditions that determined it ; and this because
of a certain influence exercised by the rate itself which is
described by Professor Sidgwick as compensatory or equilibratory.
In fact, an upward variation in the current rate of interest,
1 In mercantile practice the following distinction is drawn : — Partnerships
and companies which use a considerable portion of their productive capital, such
as public stocks, shares, bonds, lands, etc., merely as a guarantee for their
engagements, do not take into account the fluctuations of this capital which
result from variations in the current rate of interest, and accordingly enter in
their accounts either the proceeds only of this capital, or the capital itself, but
at cost price. The others, on the contrary, enter every variation in the value of
capital to the benefit or detriment of the dividends, and mitigate the effect by
means of general and special reserve funds, which are maintained at the expense
of the dividends, but which help to keep up the prices of shares.
262 GENERAL THEORY OF VALUE PART in
due to an increase in the demand, must tend to produce a
subsequent fall, by furnishing an incentive to increase the
supply of capital, and vice versd. At all events between a
minimum limit (but above zero) and a maximum limit, it
appears certain that variations in the rate of interest could
not be realised and maintained without occasioning consider-
able displacements in the amount of disposable capital, in
consequence of the reaction of the rate of interest on savings
and on productive consumption.1
§ 7. Of Interest in connection with the Value of Money
and Discount
The rate of interest bears no relation to the quantity of
disposable money, the rapidity of its circulation, or the existing
demand for it as a medium of exchanges, or in other words, to
the value or purchasing power of money at a given time or place.
If a hundred pounds will buy a productive commodity, say
a certificate of public stock or a house, yielding a return of
four pounds per annum, any rise or fall in the value of money,
causing the capital value of the productive commodity to vary,
acts in the same sense, and in the same measure, on the value
of the return. The greater or smaller number of counters
which must be used to denote the prices of all commodities
makes no difference in the demand and supply of capital.
It cannot however be denied that a variation in the
amount of disposable money, and consequently in its value,
may temporarily affect the rate of interest, inasmuch as the
capital awaiting investment exists in the form of money.
Suppose money to be depreciated : this fact will in no way
diminish the amount of disposable capital, but as it is offered
in the form of money, it will have a smaller purchasing power
than before, that is, it will be a smaller quantity of real capital ;
or conversely, if we consider it with reference to the demand,
owing to the rise in prices, the amount demanded will be
larger. Hence the rate of interest will vary inversely as the
value of money, rising as the latter falls, and vice versd. These
propositions may be termed J. S. Mill's theorems. 2
1 Sidgwick, op. cit. p. 291.
2 J. S. Mill, book iii. chap, xxiii. § 4, pp. 390, 391.
CHAP, in OF THE VALUE OF CAPITAL 263
Moreover as regards the relations between discount and
interest, the same author shows that their tendency is to vary
along parallel lines and in the same direction ; for money is
exchanged for every other economic commodity, and it cannot
therefore be supposed that a different price should be paid for
the use of money, i.e. as discount, than is paid for the use of
any other commodity whose value is expressed in money, i.e.
as interest.1 Nevertheless it is clear that, notwithstanding a
necessary parallelism between the variations of discount and
of interest under a system of pure economics, capital and
money are essentially different, and the market for loans of
capital is not the market for loans of money. For the person
who wants to borrow capital, money is only a means for pro-
curing it, and is in fact immediately exchanged for those com-
modities which alone are really efficient in rendering labour
more productive.
1 This does not prevent differences being observed in practice, the prin-
cipal reason of which is that interest is always combined with other elements,
especially with profits, a form of surplus rent.
CHAPTEE IV
OF THE VALUE OF NATURAL AGENTS
§ 1. Of the Value of Land
AMONGST instrumental commodities must be ranked many
natural agents ; most of which, however, exist in unlimited
quantity, as compared with the demand, and consequently
possess no value. This is no longer the case, in a consider-
able portion of the world, as regards the natural agent which
ranks first with respect to human wants, viz. land ; a term (it
may be well to remark) which comprises, in economics, more
things than are understood by it in its ordinary acceptation ;
so many, indeed, that it is perhaps impossible to enumerate
them. Suffice it to say generally, that land signifies the soil
which is essential to the processes of vegetation, all useful
mineral substances found beneath the surface of the earth,
all those useful forces of nature that are manifested in con-
nection with the land, and even those complex conditions or
states of things, by reason of which we are made aware of
their reciprocal position or situation in space, i.e. of their
respective distance from one another and from ourselves.
The value of land, like that of every other instrumental
commodity, is computed by estimating the final degree of utility
of the least valuable product derived from it, and by deter-
mining the extent to which this degree would be affected by
the absence of the land from the combination with other
complementary commodities to which the product is due. In
a state of society where capital exists, the value of land is
obtained by capitalising, at the current rate of interest, the
CHAP, iv OF THE VALUE OF NATURAL AGENTS 265
net rent of the land. ' A piece of land which yielded no rent,
i.e. the use of which could not be sold, would be valueless.
Supposing on the contrary a stage of economic develop-
ment anterior to the creation of capital, but in which never-
theless the extent of available land falls short of the demand,
its value will be determined by multiplying the rent, in
accordance with the rule of Ortes (part i. chap. iv. § 6), by
the coefficient which denotes the value we attach to a per-
manent source of future income, of a given amount, as com-
pared with present commodities. This coefficient will of
course be very different in the respective cases of an individual
and a tribal egoist (part i. chap. ii. § 3), for the period during
which either of them will wish to Jcnoiv that his future wants
are provided for, will le very different.
Besides being an instrumental and complementary com-
modity, land is in many cases a direct complementary com-
modity, and sometimes, too, simply a direct commodity. In
these respects it naturally follows the common laws of value
for direct commodities, i.e. it has an independent final degree
of utility, which the parties concerned perceive or realise in
individual cases.
As the value of land, as an instrumental commodity,
depends on the rent it yields, that is the economic phenomenon
which has always attracted the attention of economists.
§ 2. The Statical Theory of JRicardo's Law of Rent
The law of Eent, in the form given to it by Ricardo, con-
sists of three distinct theories, viz. : an historical theory as to
the origin of Rent, a statical theory as to the causes that, at any
time and place, determine the nature and utility of Rent, and
a dynamical theory of the causes which continually tend to
increase Rent.1
Of these three theories, only the last two relate to questions
of pure economics; nevertheless incidentally we shall give
some account of the first as well.
The statical theory of Eent is adduced to explain the
existence in certain branches of industry of a permanent
1 Sidgwick, op. cit. book ii. chap. vii. p. 304.
266 GENERAL THEORY OF VALUE PART in
surplus value in the produce.1 Let the following conditions
be assumed as premisses : 1st, That equal units of the same
product, of uniform quality, fetch the same price, at the same
moment, in the same market, — this premiss being nothing
else than Jevons's well-known law of indifference (part ii.
chap. iii. § 1). 2nd, That equal quantities of instrumental
commodities, each combined with equal quantities of comple-
mentary commodities of the same quality, yield different
quantities of the same product, if the quality be equal, or
different qualities, if the quantity be equal. In other words,
a different cost of production is postulated for equal portions
of the same product ; which premiss may be simply assumed,
or may be taken to be a real condition due to the law of
decreasing productivity (part ii. chap. iii. § 6). In fact,
supposing an industry subject to this law, a first portion
of capital invested in it will yield a determinate product, a
second, a less product, and the third, one still smaller. We
then have an instrumental commodity combined with three
equal portions of a complementary commodity, which in each
combination yields a quantitatively different product, the
quality being the same. 3rd, That the quantity of produce
derived from the most fertile or productive instrumental com-
modities (or the quantity of produce which may be obtained
at the least cost) is inferior to the demand. This premiss
means that the price of the produce must be at least such as
to remunerate even those producers whose cost of production
exceeds that of the rest ; or that it must be equal to the
maximum cost of production, in order that there may be a
hedonic incentive to produce the required amount. This
premiss is simply postulated, for there is no law from which it
necessarily follows, that the demand for a commodity must be
of such magnitude as to exceed the production of the instru-
mental commodities of first quality, and to render it necessary
to have recourse to the produce derived, or obtainable, from
instrumental commodities of second, or still lower, quality.
Given these three conditions, Rent is a necessary pheno-
menon, consisting in the difference between the profits earned
: Cairnes, Logical Method, lect. viii. p. 653. One of the best works on
all questions relating to Rent is Loria's La Rcndita fondiaria e la sua clisionc
naturale, Milano, Hoeplr, 1880.
CHAP, iv OF THE VALUE OF NATURAL AGENTS 267
by the owners of the most productive instrumental commodi-
ties,1 and those earned by the owners of the least productive
instrumental commodities that are yet employed in produc-
tion in order to meet the existing demand ; or in the differ-
ence between remuneration and cost obtained by all those
who produce at a less cost than the maximum yet covered by
the price.
Eicardo has given the best possible illustration of this
theory. Suppose lands similarly situated, but of various
degrees of fertility, to be cultivated at the same time ; and let
them be of three qualities, so that, at an equal cost, the first
quality will yield a produce of 100 quarters of corn, the
second of 80, and the third of 60. Let us suppose also
that the total produce of these three qualities of land, i.e. 240
quarters, is required by the only available market, i.e. that
the price paid for corn by the consumers in this market makes
it still just remunerative to cultivate the land which only
yields sixty quarters, at the same cost as is required for the
cultivation of the other two portions of land. Further, let us
suppose that the cost of cultivating the worst land that is
still cultivated amounts to £45, or fifteen shillings per
quarter ; and let this be at the same time the price of corn.
As there can only be one market price, the produce of the
three portions of land will be paid for at the same rate ; thus
the person who has grown 100 quarters will receive in return
for his trouble a hundred times the price of the unit of
measurement, i.e. £75 ; the person who, at the same cost,
grows eighty quarters will obtain a return of eighty times
the unit of measurement, i.e. £60 ; and the person who grows
the sixty quarters will obtain sixty times the price, i.e. £45.
But if the cost to which the three producers submit is the
same in each case, and is sufficiently compensated, in their
estimation, by a return of £45 for sixty quarters, it follows
that the person who obtained £60, i.e. eighty times the unit
of measurement, must consider his return as divisible into
two parts, viz. : a first part of sixty times the price, which
1 Those commodities are most productive which, owing to whatever condition,
yield the largest mass of utility to their owner. Rent may therefore be due to
the action of many forces. Bonamy Price, Practical Political Economy, 2nd ed.
p. 351.
268 GENERAL THEORY OF VALUE PART in
constitutes the remuneration strictly necessary to induce him
to submit to the cost, and a second part of twenty times the
price, constituting a surplus profit, called rent. And, a
fortiori, the person who obtained a hundred times the price of
the unit of measurement will divide the return into sixty
times the price, which amount covers the cost, and into forty
times the price, which sum constitutes rent. The total
amount of rent yielded by the three lands will then be
determined by multiplying the sum of the twenty and forty
measures by the unit of price.
Even without working out the return in money, we may
say that a hedonically constituted person, who cultivates three
equally-sized portions of land, which yield, at an equal cost,
100, 80, and 60 quarters of corn, — 240 quarters being the
amount he needs, — will attribute to the sixty quarters derived
from the least fertile soil, a final degree of utility equal to the
final degree of negative utility of the cost ; and consequently
he will consider the extra twenty quarters obtained from the
second portion of land, and the extra forty yielded by the
third as a surplus produce, or rent.1
The difference in the productiveness of three lands such
as those supposed, may be determined either by differences of
fertility, or l>y differences of accessibility, ie. of proximity to
the market; so that the fertility being equal, the cost of
production, including the placing of the goods on the market,
will be graduated. But we may have the phenomenon of
rent in the cultivation of a single piece of land, in consequence
of the law of decreasing productiveness. This case, though not
expressly mentioned by Kicardo, is quite obvious. In fact,
suppose a single portion of land and a single producer ; and
let a first portion of capital invested in his land yield him a
return equal to 100, a second portion, — in consequence of
that law — only a return equal to eighty, a third a return
equal to sixty, and let this last amount be the minimum
remuneration he considers hedonically equivalent to the
capital he has sacrificed (part i. chap. iv. § 10). Then
1 If we suppose three persons to cultivate three portions of land, the natural
fertility of which is graduated as 100, 80, and 60, — and that these three persons
are constituted, hedonically, alike, — they will not submit to equal costs in order to
obtain returns at the respective rates of 100, 80, 60 ; but will, on the contrary,
procure equal returns, i.e. each equal to 60, submitting to different costs.
CHAP, iv OF THE VALUE OF NATURAL AGENTS 269
the extra amount obtained by the first two investments, viz.
forty by the first, and twenty by the second, are rent.
Kent is therefore said to have three possible efficient
causes, viz. : (a) differences of fertility in lands cultivated
at the same time ; (&) differences in the distance of the lands
cultivated from the market, — such distances to be reckoned
not topographically, but in terms of cost of carriage; (c)
decreasing productiveness of the capital invested in the same
land for the same purpose.
Abstracting from the law of indifference, rent, according
to what has been said above, is due to the concurrence of two
conditions, viz. : (a) that the supply of instrumental commodities
of the first quality, or maximum productiveness, should be less
than the demand ; (&) that the law of decreasing productive-
ness should exist, i.e. that the products derived from the
instrumental commodities of the first quality should have a
higher cost of reproduction. In view of these conditions, we
may formulate this law : Rent is not the cause, but the effect, of
high price.1 In fact, the person who produces 100 quarters
at a given cost, whilst another whose produce is of a quality
that is still in demand, only produces 8 0 at that same cost,
and a third only produces 60, receives a rent of £40, and the
second a rent of £20, if the price per quarter is twenty
shillings, and just suffices to cover the expenses of the one
who produces 60, together with the interest on his capital
and remuneration for his labour, amounting in all to £60.
But the price per quarter is not twenty shillings, because the
rents are £40 and £20 ; it is the amount of the rents that is
determined by the price ; and the price is twenty shillings
per quarter, because if it were not, then the individual who
produces only 60 quarters, at the same cost at which others
produce 80 and 100, would leave off producing, and the supply
1 Ricardo, p. 51. A. Smith, Wealth of Nations, 1892, p. 115 : "Rent, it is
to be observed, therefore, enters into the composition of the price of commodities
in a different way from wages and profit. High or low wages and profit are the
causes of high or low price ; high or low rent is the effect of it. It is because
high or low wages and profit must be paid, in order to bring a particular com-
modity to market, that its price is high or low ; but it is because its price is high
or low, a great deal more, or very little more, or no more, than what is sufficient
to pay those wages and profit, that it affords a high rent, a low rent, or no rent
at all."
270 GENERAL THEORY OF VALUE PART m
of corn no longer satisfying the demand of the market, the price
would rise until it again became remunerative for the third
producer. It is therefore the cost of his production, — which
is still necessary — that regulates the price and enables the
others to obtain a rent.
Can there be a rent apart from qualitative differences in
lands cultivated at the same time ?
Let us suppose that there are only instrumental com-
modities of the first class,1 i.e. lands which, at a given cost,
produce 100; and that these lands are less in amount than
the demand. It is clear then that the only limit to the
price of the produce consists in the comparative degrees of
final utility of these and of other commodities for consumers,
or, as we usually say, the demand forms the only limit to
price. But the price obtained over and above the reimburse-
ment of cost, is termed a surplus profit. Now let us suppose
that in addition to the former, there come into existence
instrumental commodities of the second class, that is lands
which, at the same cost, produce only 80, and let these be un-
limited in quantity. It is obvious that now the former lands
will yield a surplus profit limited, no longer by the demand
alone, but by the cost of reproducing the products obtained from
them, on the inferior lands ; they will therefore yield a rent
in kind of 20. This rent will be the same surplus profit as
before, only reduced in amount, i.e. it will be a qualified surplus
profit. If the demand for their produce grows to such an
extent that the available amount of instrumental commodities
of second quality comes to be limited, these, equally with those
of first quality, will yield a surplus profit which will again be
limited solely l>y the comparative degree of final utility of their
produce and of the other products that are in demand. Let us
now suppose that instrumental commodities of the third class
come into existence, i.e. lands that are still less fertile, and
that, in return for an equal cost, yield only 60. These in turn
will determine a cost of reproduction which will limit the
surplus produce of the instrumental commodities of the
two preceding categories, the owners of which respectively
1 A. E. Cherbuliez, Prdcis de la science tconomiquc, Paris, Guillaumin, 1862,
p. 483 ; Mathieu Wolkoff, Opuscules sur la rente fonciere, Paris, Guillaumin,
1854, p. 5.
CHAP, iv OF THE VALUE OF NATURAL AGENTS 271
will now receive rents of 40 and 20. Hence it is obvious
that rent is only a qualified surplus produce, and that it
is due to the scarcity of instrumental commodities of superior
productiveness.1
If a surplus produce is realised in the case of instrumental
commodities of the same class existing in a limited quantity, so
that it has no limits save in the comparative degrees of final
utility, or as Ferrara puts it, the economic cost of reproduction,
or as it used to be termed, the demand of consumers, it is also
said to be the result of a monopoly, a most inappropriate term
by which to express the relation between demand and dis-
posable quantity. As soon as an inferior instrumental com-
modity comes into competition with a pre-existing one of
superior quality, so that the surplus produce of the latter is
limited by the cost of reproduction 2 of the former, the surplus
produce is called rent. As to whether it is the effect or cause
of price, it is clear that, even in the case of there being only
one class of instrumental commodities, it may always be said
that surplus produce is the effect of price, for even if the
owners of the scarce instrumental commodity were to decline
it, which would be antihedonic, it would still exist in the
shape of the reduced price paid by consumers ; for it is in
the nature of things,3 and is not due to the will of the parties.
Just as rent, or surplus produce, may be exhibited in the
case of a single class of instrumental commodities, e.g. lands of
the same quality, provided the amount of such commodities be
inadequate to the demand, so too it may be realised, when there
are several classes of instrumental commodities, in the case of
the least productive instrumental commodity, provided the
demand for the product due to these instrumental commodities is
greater than the disposable quantity, and hence that the price
of the product is greater than the cost of production, but yet
not so much as to make it remunerative to fall back upon a
1 Sidgwick, op. cit. p. 298. See Ferrara's Prefazionc al Carey, Biblioteca
degli econ., tome xiii. p. xliii. : "Rent arises apart from the competition of
different lands."
2 Recent German writers use the term Substituzionswerth, which appears to
be nothing else than Ferrara's cost of reproduction. See the Teorica dei suc-
cedanei in Minghetti's Dell' econ. pol., book ii. p. 110, note.
3 i.e. in the relation between two FACTS: the demand, which has given
dimensions, and the supply, which likewise has determinate dimensions.
272 GENERAL THEORY OF VALUE PART in
class of instrumental commodities of yet inferior produc-
tiveness, if such there be, or to induce people to use
some substitute in lieu of the product. This rent which
may be yielded, say by lands of the lowest quality that are
yet cultivated, should rather be called a surplus produce,
if the name of " rent " is denied to the surplus produce that
may be yielded even by instrumental commodities of one
class.1
As regards the law of the variation of rent,Eicardo suggested
the hypothesis of a rise in the price of commodities, i.e. of the
produce derived from the instrumental commodities of various
fertility that were employed, and of this rise being due in turn
to an increase of the population, that is of the demand for
food. In this way he explained the rise of rent, by supposing
that the increased demand covered the cost of production on
lands less fertile than the worst that had till then been cul-
tivated ; and vice versa, he explained the fall of rent, as due to
some agricultural improvement (that is, to a reduction of the
maximum cost of production) making it possible to produce
the same amount as before, whilst cultivating a smaller extent
of land, the population remaining stationary.2
These hypotheses must be allowed to constitute sufficient
causes to determine a variation of rent in the precise sense
indicated by Eicardo. It must however be observed : (a) that
they do not constitute the only possible combination of causes
that may determine a variation of rent ; (&) that probably they
would not really be found to exist in^the combination supposed.
In fact, as regards the first point, it is clear that just as an
increase of rent may be occasioned by a rise in the prices of
the produce of land, if the cost remains the same, so too an
increase may be realised, if the prices of the produce remain
stationary, whilst the maximum cost of production falls, and
1 The possibility of rent being derived from the lands of lowest quality still
under cultivation was noticed by J. B. Say in his Note to Ricardo, p. 52.
Cherbuliez, vol. i. book iii. chap. i. sec. 2, § 1, p. 409. If the surplus produce
from lands of lowest quality, which is theoretically possible and has probably
been realised hundreds of times in close markets, is admitted to be rent properly
so called, then the surplus produce that land of one uniform quality may yield
when its quantity is short of the demand, is also rent, and there is an end to
the distinction some have made between rent and many forms of surplus
produce.
2 Ricardo, op. cit. pp. 53-56.
CHAP, iv OF THE VALUE OF NATURAL AGENTS 273
vice versd.1 Now all progress of the technical arts produces
reduction of cost (for that is precisely what it consists in),
and the value of the produce may, notwithstanding the re-
duction of cost, remain stationary, if there is an increase of the
demand due to an increase of population. This explanation
of rent, which is fully as adequate as the former, supposes a
combination of causes that is easily realised. For, to touch
on the second point, Eicardo's combination supposes that the
increase of population precedes the increase in agricultural pro-
duction, and is indeed the cause of the latter, whilst the other
explanation, which is due to Thorold Eogers,2 supposes that
the progress of agricultural improvements determines a larger
production at an equal cost (or an equal production at a less
cost), which is neutralised by a subsequent increase of the
population, so that there is no diminution in price.3
It must be observed, that if the prices of produce increase,
whilst the cost remains stationary, as also if the cost
diminishes, whilst prices remain stationary, rent rises owing
to a twofold cause. A rise in the prices of produce has the
effect of making a smaller amount suffice to cover the
maximum expenses of production, so that a larger quantity
of produce remains available as rent. But if prices have
increased, each unit of that quantity of produce which con-
stitutes the rent is worth more than it was before. Con-
versely, if prices fall, the rent diminishes owing to the action
of a twofold cause.
The theory of rent may nowadays be stated in a
more accurate, general and concise form, which we borrow
from Signor Pareto, and which is as follows : — The price
which we pay for the use of land differs in no way from
the price payable for whatever capital, say, an engine.
After having restored the land or the engine, in the same
1 Cairnes has formulated these two possibilities in the following elegant
theorem : Given the price of agricultural produce, economic rent will vary
directly as the productiveness of agriculture ; or, given the productiveness of agri-
culture, rent will vary directly as the price of produce.
2 This theory was really originated by Richard Jones : An Essay on the
Distribution of Wealth, London, Murray, 1831, p. 283.
3 Rogers, Six Centuries of Work and Wages, 2nd ed., 1886, p. 482. Also
his Manual of Political Economy, 3rd ed., pp. 152 to 168 ; Shadwell, op. cit.
p. 197.
T
274 GENERAL THEORY OF VALUE PART in
condition in which they were received, we pay a certain sum
in addition, only because these capitals exist in a smaller
quantity than the demand, i.e. they are economically rare.
What distinguishes the case of the land from that of the
engine is that savings earned by the use of the latter may be
easily and rapidly invested in other engines, which cannot
usually be done in the case of land, or only at such prices
as to be no longer advantageous.
In order to make it clear how it is, that capitals existing
in a quantity that admits of no increase produce a rent, let
us suppose a colony in which
lands are at first abundant,
but are ultimately all occu-
pied. In order to simplify
yi the argument, let us suppose
lands of the same degree
of fertility. Let OQ (dia-
gram XLIX.) denote the
quantity of land, and OP the
rents that are paid. Let us
suppose that to till the land
involves an expense equi-
valent to a rent Op. At the
price Op, as much land can
be had as is wanted, as long as the quantity pq lasts.
Afterwards the quantity of land remaining the same, only
the price will vary. The supply of land will therefore be
denoted by pqY. So long as the demand is denoted by
a curve like xy, which cuts pq, the price, i.e. the rent, will
be constant, and only the quantity (pm) of land which will
be cultivated will vary. But if the demand were to increase
in the measure denoted by x^ yl} which cuts qY in mlt all
the available land will have been occupied, and only the price,
denoted by m1} will vary.1
1 See V. Pareto, op. cit. §§ 759, 760. This author also explains why it
is erroneous to say that price is the cause of rent, or that rent does not enter into
cost of prodiwtion. §§ 766 and following.
CHAP, iv OF THE VALUE OF NATURAL AGENTS 275
§ 3. The Dynamic Theory of Ricardo's Law of Rent
The static theory of rent has shown us, that rent neces-
sarily increases if, cceteris paribus, an increase of the popula-
tion and the public wealth is supposed. K"ow, Kicardo opined
that, in consequence of this, rent must tend to increase, such
tendency being neutralised only by the progress of the tech-
nical arts.1 The dynamic doctrine of rent supposes, as a fact,
that population has a constant tendency to increase more
rapidly than the means of subsistence ; which premiss is
called Malthus's law 2 of the increase of population, and is in
its turn intimately connected with the law of decreasing
productiveness.
In fact, Malthus's law consists of two cardinal propositions,
the first of which asserts, that if individuals were to marry as
soon as they are of a marriageable age, and if they were not
decimated by vice and poverty, and did not artificially avoid
the procreation of children, the population would be doubled
every twenty or twenty-five years. The second proposition
asserts, that the law of decreasing productiveness being what
it is, economic productiveness could not, after the population
had attained a certain limit of density, keep pace with the
potential birthrate ; and that this deficiency acts as a check
on the tendency to multiply the race more rapidly than the
growth of the means of subsistence. The operation of this
check is attended by much suffering which can, and should
be, artificially alleviated.
It is easy to understand how the increase of rent is
1 Whilst the static theory makes a hypothesis, the dynamic theory affirms
the hypothesis as a reality.
2 The static law of rent had been expounded by other writers before
Ricardo, particularly by Malthus in 1815, to whom Ricardo refers in his pre-
face. Moreover Anderson formulated it with great precision in 1777, in a
monograph of merely passing interest, and the celebrated Serra noticed it in
1613 in his Breve trattato delle cause die 2>ossono fare abbondare li regni d'oro
e d'argento, part i. chap. iii. p. 24, Ed. Custodi, Parte Antica, tome i. vol.
xlii. Similarly Malthus had many predecessors, notably the Swiss physician
Herrenschwand in his Discours fondamental sur la population, 1786 (trans-
lated from English into French in the third year of the Republic), and Ludo-
vico Ricci of Modena, who wrote in 1787 on the reform of the charitable institu-
tions of his town. See also Ortes, Riflessioni sulla popolazione delle nazioni
per rapporto all' Econ. Naz., Collez. Custodi, vol. xxiv. chap. i. p. 23.
276 GENERAL THEORY OF VALUE PART in
explained by supposing the population to be constantly
increasing, for this circumstance necessitates less fertile lands
being brought under cultivation than those which had till
then been utilised. It should be observed, that by demon-
strating inductively that prices of agricultural produce have
risen wherever population and wealth have increased, we do
not demonstrate the truth of Eicardo's law ; since it may be —
and is actually the case as we have already seen in demon-
strating the static theory — that another hypothesis will
equally explain that fact. Similarly, by demonstrating in-
ductively that prices of agricultural produce have remained
stationary throughout extensive districts, we do not refute
the same law, which admits that the tendency of population
to increase, and consequently of prices of agricultural produce
to rise, may be neutralised by the progress of the technical
arts ; and this would be said to have occurred, in accordance
with that law, in view of the fact of prices remaining the
same.
In fact, inductively and with the aid of history and
statistics, on this question, as on almost every other economic
question until now, no final conclusion has been arrived at,
one way or the other. On the contrary, a priori, it may be
held that whilst population may increase more rapidly than
the production of many kinds of produce, it cannot increase
without an antecedent increase of the produce on which the
sustenance of the human race mainly depends. In the event
of a sudden increase of population taking place, — which may
occur locally, as e.g. through immigration, — it becomes neces-
sary to recur to inferior lands. But even this phenomenon
presupposes a supply of food that will suffice until the pro-
duction is increased. As a general and normal phenomenon,
the preparation of food must precede the increase of popula-
tion, in accordance with the law of Ortes (part iii. chap. iii.
§ 1), and therefore increments of population do not determine
the supposed rises in price of alimentary produce, nor the
consequent rise of rent. Hence in formulating the dynamic
law of rent, instead of saying with Eicardo, that because land
which yields only 84 quarters is cultivated, therefore
land that yields 105 quarters produces rent, we should
rather say that, owing to the progress of agricultural improve-
CHAP, iv OF THE VALUE OF NATURAL AGENTS 277
merits, it is possible to obtain 105 quarters from land that
yielded formerly only 84, and more than 105 from land that
previously yielded that amount, and that these increments in
productiveness become rent because the increase of population
rendered possible thereby prevents the fall of prices.
8 4. Historic Theory of Ricardo's Law of Rent
The historic theory maintained by Eicardo, as we have
already remarked, possesses no doctrinal importance ; it must
however be noticed briefly, both having regard to the fact of
its having been propounded by so eminent a thinker, and
because it is in harmony with the two theories already ex-
plained. It may be summed up in the formula that : the
human race, having always cultivated land only from hedonic
motives, have always confined themselves, in the first instance,
to those lands which, having regard to the technical knowledge
and appliances, and generally to the resources, available for the
time being, and considering the kind of wants that required to
be satisfied, yielded the largest return in proportion to cost.
It must be borne in mind, that the fertility of land can
only be discussed with reference to some particular kind of
produce, a point Eicardo emphasised by considering it with
reference to only one kind, viz. wheat. This being so, Ei-
cardo's theory is not disproved by demonstrating inductively,
that with the progress of civilisation and the consequent
changes in human wants, sandy soils have come to be more
valued than heavy soils, or vice versa. It must further be
borne in mind, that the fertility of any soil is always relative
to the means available for cultivating it ; or in other words,
that the maximum fertility consists in the maximum difference
between production and cost. Hence Eicardo's theory is not
refuted by proving inductively that lighter and less fertile
soils were cultivated first, and that the cultivation of richer
soils was undertaken only when the technical arts were more
advanced, and capital and labour more abundant. Indeed that
argument confirms his theory, inasmuch as it proves that the
lighter soils were cultivated before the others, because the
cost involved in tilling them was so much less than would
have been required, at that time, to cultivate the richer soils :
278 GENERAL THEORY OF VALUE PART in
that the net produce of the former was more than that of the
latter.1
§ 5. Of Profits as Rent — Mr. F. Walker's Theory
Eicardo's law of rent applies very widely, but the precise
limits of its scope are still a matter of controversy.2 In any
case among instrumental commodities that are natural agents
existing in extremely limited quantity, must be ranked the
aptitude for various kinds of work, and among these the
capacity to conceive, direct, and carry out industrial and com-
mercial undertakings. It was noticed already by J. S. Mill
that agricultural productions are not the only commodities
which have several different costs of production at once, but
that even fisheries, unless in the open sea, exhibit phenomena
of rent, and that mines are also an instance. But what is
most remarkable is that extra profits similar to, or identical
with, Kicardo's rent are exhibited in the case of legal mono-
polies, such as are created by the grant of patents, or of
natural monopolies consisting in the special aptitudes of mind,
or character, or physique of the workers. " The extra gains
which any producer or dealer obtains through superior talents
for business, or superior business arrangements, are very much
of a similar kind." 3
This theory has been developed by Mr. Walker, so as to
form a special theory of profits* which should be called by his
name. An entrepreneur usually contributes to the success of an
1 On this subject see the minute and accurate study of Mr. F. Walker,
Land and its Rent, chap. ii. p. 37.
2 A. Loria, Rendita fondiaria, pp. 145-164, E. Nazzani, Saggi di econ.
politico,, Milano, Hoepli, 1881, No. 2, p. 3. Those who limit the pheno-
menon of rent most, admit its existence in agriculture and in the extractive
industries, which are subject to the law limiting the productiveness of capital
and labour ; but not in manufacturing industries, save in so far as these make
use of natural forces connected with the soil.
3 J. S. Mill, Principles of Political Economy, p. 290 ; A. Marshall, Pure
Theory of Domestic Values, chap. ii. § 5, p. 29 : "The increased wage may be
regarded partly as a rent of scarce personal qualities " ; A. Schaeffle, Die
Nationalokonomische Theorie der ausschliessendcn Absatzverhaltnissc, Tubingen,
Laupp, 1867, iii. iv. v. vii.
4 F. Walker, Political Economy, pp. 247-257 ; Quarterly Journal of Economics,
April 1887, vol. i. No. 3, p. 256, vol. ii. No. 3, p. 263 ; A. Marshall, Economics
of Industry, p. 144.
CHAP, iv OF THE VALUE OF NATURAL AGENTS 279
industrial undertaking in a variety of ways, which may how-
ever be summed up under two heads : 1 his contribution to
the capital of the undertaking, and his contribution to its
labour. In his capacity of a capitalist, he must receive out
of the returns of the business the current rate of interest,
if the partnership is regulated by strictly hedonic principles ;
but such interest is not necessarily part of his remuneration,
for he may also work only on account of others. If he is a
capitalist, he necessarily bears the risk of the undertaking,
and he will not incur this risk if the market is not such that
the prices of products leave a sufficient margin to cover it
during a longer or shorter series of years. But even if he
is not a capitalist, he may have undertaken the risk under a
contract a forfait or per aversionem, in which case he would
pay a fixed sum to the capitalist and the workmen, reserving
to himself the proceeds, large or small, of the undertaking.
Mere compensation however for the risk of an undertaking
cannot constitute a normal source of rent ; for if this com-
pensation has been estimated strictly in proportion to the
risk, it must, on an average for a number of years, be exactly
equivalent to the latter, so that the net rent left would be
equal to zero ; whilst, on the other hand, if the compensation
is not commensurate with the risk, it is anti-hedonic in its
origin, the disproportion being due to ignorance as to the
frequency and magnitude of the risk. It is thus apparent
that only his share in the undertaking as a worker can be a
normal source of rent to an entrepreneur, and the character
of this work is deserving of attention. In the first place, it
involves the discovery or devising of undertakings, that is,
the labour of seeking out opportunities for the profitable
investment of capital and employment of labour. This pre-
supposes an accurate knowledge of the conditions of the
markets of capital and labour, i.e. of the current prices of
both ; a knowledge of the least costly technical processes by
means of which the projected product can be obtained ; and
1 " II n'y a que deux titres dans notre societe qui conferent un droit au
partage : ou bien fournir son travail personnel, ou bien fournir un instrument
du travail, terre ou capital. L'entrepreneur peut invoquer soit 1'un, soit 1'autre
de ces deux titres, plus frequemment meme tons les deux a la fois, mais il ne
saurait en invoquer un troisieme, car il n'en existe pas." — Ch. Gide, Principes
d'ecan. pol., Paris, Larose, 1884, liv. iv. chap. i. § 3, No. 4, p. 519.
280 GENERAL THEORY OF VALUE PART in
a very nice estimate of the prospective value of the projected pro-
duct, as compared with the present value of the instrumental
commodities which the technical process fixed on requires to be
employed, and consequently to be diverted from other uses in
which they would also have final degrees of utility. It is
further necessary, that the entrepreneur should not only carry
out his scheme in conformity with his estimates, which entails
a certain, and sometimes a considerable, amount of physical
activity; and in addition to this he must, whilst the work
is in progress, revise his estimates from time to time, in order
to adjust them to the fluctuations in value that occur, either
in the markets from which he obtains his implements, or in
those in which he proposes to sell his produce.1
This being premised respecting the functions of entre-
preneurs, let us suppose a close market in which there are a
certain number of contractors having a monopoly of industrial
or commercial undertakings ; and this whether the monopoly
be determined by a natural condition of things, i.e. by the
fact of their alone possessing the requisite natural capacity, or
by customs or laws conferring an exclusive privilege.2 Let us
suppose further that the natural capacities of all the entre-
preneurs are in all respects equal. What share of the profits
of the undertakings will they be able to command ? If the
entrepreneurs are few, and act together as one man, it is
obvious that their services will command a price limited, like
that of any complementary instrumental commodity which can
neither be reproduced nor replaced, and which is at the same
time absolutely necessary for the production of a given class
of commodities, by the final degree of utility of these, compared
with the final degree of utility of the price, i.e. as it is
usually termed, by the demand. But if, instead of being few,
the entrepreneurs are so numerous as to be unable to create
a monopoly of their services, and rather compete against one
another, then it is clear that the price of their services will fall
to a point at which they will find it more advantageous to
make some other use of their capacities for work, or at which,
1 On the functions of the entrepreneur see a most brilliant analysis by
W. H. Mallock, Labour and the Popular Welfare, book i. chap. v. p. 138 ct scq.,
and a mathematical analysis by E. Barone, Studii sulla distribuzionc, besides
Pareto, vol. ii. §§ 705-725.
2 Quarterly Journal of Economics, April 1887, p. 269.
CHAP, iv OF THE VALUE OF NATURAL AGENTS 281
in other words, their services are the cost of reproduction of
another price ; or to express this proposition, in terms we have
used before, the complementary instrumental commodity they
dispose of has a different final degree of utility, in the three
alternatives of its being a complementary commodity in other
combinations, an instrumental commodity for other purposes,
or a direct commodity. If no such point or limit existed, the
remuneration of their services might, on the above hypothesis,
fall to a limit at which it would barely suffice to maintain the
requisite number of entrepreneurs, and to stimulate the de-
velopment in them of the qualities demanded by the market.
We have, however, a downward limit to the price of their
services, albeit a much higher one than the lowest limit just
mentioned, in the possibility there is for the entrepreneur to
offer his services in the labour market, i.e. in the current rate
of wages. In this way, on the same hypothesis, profits must
come to be effectually equalised, for the competition between
entrepreneurs would prevent any price being obtained above
that rate. If profits were cut down to this limit, they should
be called wages, and should, as profits, be considered as nil.1
Now, varying our hypothesis, and supposing a difference
in the respective aptitudes of the entrepreneurs, what will
the consequence be, as regards the prices of their services ?
Let us suppose, in the first instance, two individuals whose
productive capacity is expressed in terms of two indices, say
the capacity of one by an index of 10, the capacity of the
other by an index of 20. If it is worth a capitalist's while
to pay thirty shillings a week to the first, i£ will be equally
worth his while to pay sixty to the second. Both offer a
complementary instrumental commodity, but the efficiency of
the commodity offered by the first is only equal to half the
efficiency of the commodity offered by the second. It is
obvious that, if the second were content to offer his labour at
thirty-one shillings, every one would prefer him to the first ;
and this would still be the case if he offered it at thirty-two
shillings ; and so on, up to sixty shillings per week. Suppos-
ing a society constituted on hedonic principles, the price of
the labour of either individual could not but be in the direct
1 Quarterly Journal of Economics, April 1887, p. 271. See contra F. Y.
Edgeworth, Journal of the Statistical Society, Dec. 1889, p. 565.
282 GENERAL THEORY OF VALUE PART in
ratio of the efficiency of his work. Let us now suppose two
individuals who, instead of offering their own labour, purchase
the labour of others, but possess different capacities for utilising
it, and combining it with instrumental commodities, and thus
promoting the success of an undertaking. Let the first,
though paying the same wages and the same interest as the
second, be able to earn a net profit expressed by the index
10, whilst the other, under the same conditions, earns a
net profit of 20. Evidently each of them will succeed in
obtaining this net profit, as there is no economic force in
operation to deprive either of them of it for the benefit of
others. It is just as if two farmers, cultivating the same soil,
with the same amount of capital, and paying the same wages,
were nevertheless, owing to the superior technical and industrial
skill of the one as compared with the other, able to obtain
different returns from the land ; say the one a return equal
to 10, the other, one equal to 20. To the landlord both
tenants would pay the same Ricardian rent, since he would
have no means of obliging the more skilful tenant to pay a
higher rent ; so that the latter would retain the proceeds of
his superior skill or productive efficiency. Now, if in con-
formity with the hypothesis we are considering, the entre-
preneurs in a close market are classified, with respect to the
efficiency of their labour, so as to range from a lowest class
that only receive the current rate of wages up to classes
exhibiting a superlative degree of productive efficiency, the
prices of products must conform to a level sufficient to cover
the cost of production of that portion of the products which
is obtained under the most disadvantageous conditions ; and
amongst these elements of cost must be ranked the labour of
the least skilful and productive entrepreneurs. But then the
most skilful ones, after having paid, cceteris paribus, the same
rent, the same interest, and the same wages as the others,
will have a larger produce in hand, which they can sell at
the same units of price as the produce of the less efficient
entrepreneurs ; in other words, they will have an extra profit,
in all respects similar to, that of the owner of land endowed
with a superior degree of fertility. That this extra profit,
or rent, is not derived either from interest or wages, is
evident if we consider that the most skilful entrepreneur can
CHAP, iv OF THE VALUE OF NATURAL AGENTS 283
a fortiori, pay the same interest and wages as the least skilful,
and that competition will compel him to do so.1 Such profits
must therefore be attributed to the different capabilities of
individual contractors,2 and it is probable that they will
increase, or at least that they will not diminish, with the
advance of civilisation ; for the demand for such services
grows as technical processes become more subtle and complex,
and as markets become more extensive, whilst there is no
apparent reason to expect an increase of the supply.
1 Quarterly Journal of Economics, April 1887, p. 277.
2 Profits may also be due to superior skill acquired by more assiduous study
or prolonged training. In that case, we have to do, not so much with a form of
rent, as with a capitalistic profit, which maybe very remunerative, but is subject
to a very different law from that regulating the investment of capital. As, with
the advance of civilisation, education is diffused, it is probable that this source
of profit will tend to decline. Here we must at all events observe that the
contractor may, in view of his personal abilities, be regarded as an instrumental
commodity in which capital has been invested, and may, on this account, obtain
an altogether different remuneration from that we have hitherto discussed under
the name of profit.
CHAPTEE V
OF THE VALUE OF LABOUR
§ 1. The Premisses of the Theory of Wages
FOR the person engaged in it, labour is an evil, i.e. a negative
commodity, and can only possess a negative value ; the labour
of others, on the contrary, is a direct,1 or an instrumental
commodity,2 i.e. a positive commodity susceptible of various
uses. If we like, we may even consider labour as being
always an instrumental commodity ; 3 but we must then dis-
tinguish the cases in which a direct utility is its immediate
result, from those in which it is more remotely instrumental,
its immediate effect being at most the production of a
commodity, the effects of which in turn possess direct utility.
I. In the theory of wages 4 abstraction is made from labour
that is a direct commodity — or that is an instrumental
commodity so proximate to a direct commodity that the
latter is its immediate effect ; — for the law of value does not
present, with respect to such labour, any difficulties that are
1 e.g. the labour of the surgeon who sets a dislocated arm, or that of a valet
who assists his master to dress, or that of a barber who shaves a customer, or
that of a public singer who entertains an audience.
2 e.g. the labour of a mason who takes part in building a house, that of
a farm-labourer who takes part in the cultivation of the soil, that of a tailor
who makes his customer a coat.
3 As, for instance, if we regard the surgeon's labour merely as the means of
procuring for us the good which consists in having our arm set, etc.
4 It is perhaps advisable to note that we must distinguish between no?/-
and real wages. Nominal wages are the sums of money received by a labourer
for a given piece of work ; real wages are the quantities of direct commodities
that he can obtain with the money. This is the real measure of his wages,
CHAP, v OF THE VALUE OF LABOUR 285
not already comprised in the general law of value. In fact,
in so far as it is a direct commodity, labour has a final degree
of utility of its own, just like any other direct commodity ;
and the questions that may be raised as to the causes of our
demand for it, and as to the causes affecting its disposable
quantity, are intimately connected with the merceological
nature of labour ; just as similar questions touching any other
direct commodity (e.g. bread, meat, wine, etc.) are connected
with the merceological nature of those articles, and can only be
the subject-matter of special studies. On the other hand,
labour as an instrumental commodity, presents a new problem,
viz. that of the distribution of wealth among the various
factors that have contributed to its production, or in other
words, the problem of attributing an effect due to an aggregate
of causes to these considered severally.
II. Moreover the theory of wages is not the theory of the
remuneration of every kind of labour, at least not in the first
instance ; but of labour pure and simple, i.e. of ordinary labour
such as may be performed by a workman without either capital
or special knowledge, or rare or exceptional skill. For any
special knowledge, such as the knowledge of a foreign language
possessed by a clerk in a counting-house, or the professional
knowledge acquired by a doctor or a barrister, is the outcome of
investments of capital ; and a considerable portion of the salary
or remuneration commanded by such special knowledge repre-
sents interest on the capital spent in acquiring it. Similarly,
special skill is a source of extra profit or rent. The law of
the value of these superior services can only be a compound
law, in which account is taken of the different laws of value
to which capital, natural agents, and pure labour * are respect-
from the operative's point of view. Here real wages are always meant. It
must be further noted that the remuneration of a labourer may be estimated in
respect of the length of time he has worked, or of the amount of the produce that
is the fruit of his labour. This is the real measure of the labourer's remunera-
tion, from the employer's point of view. If two labourers who work the same
number of hours with different degrees of efficiency are paid at the same rate for
the time during which they work, they are paid at different rates for the work done ;
the one whose work is most productive being paid least.
1 " It is convenient, in discussing the law of wages, to proceed in the first in-
stance as if there were no other kind of labour than common unskilled labour, of
the average degree of hardness and disagreeableness." — J. S. Mill, PrwtipUs,
p. 207.
286 GENERAL THEORY OF VALUE PART in
ively subject. It is a necessary consequence of the hypothesis
on which the theory of wages is based, that the latter can
only be applicable in a limited measure to actual fact, unless
modified to suit the exigencies of cases ; but this drawback, if
it be one, is common to every other branch of pure economics,
nor can this transition stage be avoided by any inquirer who
desires to become acquainted with the law of reality in all its
complexity.
III. The theory of wages presupposes finally the existence
of a single rate of wages to which all actual wages tend. How
is this to be understood, and to what extent does this hypothesis
differ from the truth ? The question is not unimportant, for
the theory of wages only claims to explain the causes that
determine the level of the rate of wages. It is obvious that
some kinds of labour are more agreeable than others; that
some, for instance, are held in the highest honour.1 Now this
circumstance, other conditions being equal, may cause the
pecuniary remuneration in such employments to be less than
in many others, without on that account preventing their being
largely sought after.2 It is moreover well known that some
professions and trades are more dangerous than others, so that
hedonists will not pursue them without some premium to
cover the risk.
The theory postulating a uniform rate of wages (and
affirming the existence of a tendency towards such uniformity)
supposes that allowance has been made for the two above-
mentioned causes of deviation from the purely arithmetical
uniformity of wages. In other words, the postulate is con-
ditioned by the non-existence of these two causes of deviation.
But the postulate of a uniform rate of wages 3 presupposes
1 There are also some kinds of labour so disgusting and dishonourable that
only those will undertake them who are cut off from all other callings. The
remuneration in these cases is very small.
2 This is a clear proof of the feasibility of establishing commensuration and
equivalence between so-called material and immaterial commodities, and that
the latter are just as material as the former. Part i. chap. iv. § 2.
3 Sometimes regularity of employment is enumerated among the preventive
causes of uniformity in the rate of wages. It is in fact obvious, that in certain
employments, work is only obtainable at certain times of year, and that no one
would engage in them unless during those periods the work were paid for at a
rate which enabled the labourers to live also during the intervals of idleness.
This cause however does not affect the rate of wages, and only serves to equalise
CHAP, v OF THE VALUE OF LABOUR 287
that labour is in a certain degree migratory ; or else the rate
of wages must be understood to be uniform within those labour
markets in which labour can migrate from one to the other.
In fact it is supposed that, within certain limits, whilst the
proportion between cost and remuneration varies from one
trade to another, labourers are able, within certain limits, to
exchange a trade in which this proportion is less advantageous
for one in which it is more so. This change may be effected,
partly by the actual change from one employment to
another, or from one locality to another, and partly by the
rising generation being brought up to the employments that
have become more lucrative, and by a more rapid increase of
the population in the localities where labour is most remuner-
ated. The employments that present the possibility of a
transfer of labour from one to the other, according as the
ratio between cost and remuneration varies in each of them,
are said to be constituted by competing groups (a term first
used by Cairnes), the others by non-competing groups.1
§ 2. Determination of the Rate of Wages in Isolated
Economics
The case of an isolated individual affords an unqualified
exemplification of Ortes's principle that "capital limits
industry," or in other words, that the amount of disposable
capital forms an insurmountable limit to the range of choice
of an employment. In fact, if we suppose that there is no
disposable capital, an isolated individual who has before him a
the rate of wages in those trades, taking longer periods than in other trades.
Moreover as regards the probability of success being greater in some trades or
professions than in others, so that those who succeed are overpaid and those who
do not succeed are ruined, it must be held that, in so far as the observation
does not coincide with a distinction respecting the degree of danger of different
professions, we are not dealing with a factor that affects the rate of wages,
because it is the high remuneration that attracts numbers of people, accentuating
amongst them the competition that eliminates the least skilful. Shadwell,
book ii. chap. iii. p. 145.
1 The subject of competing and non- competing groups in actual life, so
important for the application of economic laws, has been investigated chiefly
by Bagehot, Economic Studies, p. 21 ; Cairnes, Leading Principles, pp. 66, 91,
190 ; A. Marshall, Economics of Industry, p. 106 ; J. S. Mill, Principles of
Political Economy, p. 238 ; F. Walker, Wages Question, chap. ii. ; Political
Economy, partiv. chap. v. § 303 ; Edgeworth, Journal of Stat. Soc., Dec. 1889.
288 GENERAL THEORY OF VALUE PART in
series of employments, one more productive than the other.
only choose the one which yields him the READIEST return,
altogether independently of the position it occupies in the
supposed scale of remunerativeness of the employments in
question. For him the highest degree of utility attaches to
an immediate wage, however small ; and it is thus only with
reference to the scale of wants of other individuals who are
not in his position, that we can apply the term " more
productive " to employments in which the return is more
remote.
Supposing two individuals, one of whom already possesses
a considerable amount of capital, whilst the other is in the
position of the isolated individual already referred to, the
latter may effect an operation which in modern economics
would be termed a credit operation, by borrowing from the
other a portion of his capital, to enable him to engage in some
employment yielding a larger, but tardier, return. This kind
of operation, as exhibited under the complex economic con-
ditions of civilised countries, has led some to infer that in-
dustrial employment is limited, not by capital, but by credit.1
And yet it is clear that the total mass of capital existing in
the hands of the second individual forms the absolute limit to
the choice of employments, since all those must be avoided
that would require a larger capital, whatever may be their
productiveness ; and it is further evident that the credit
obtained by the first individual from the second is a limit, at
most equal to, but generally more restricted than, that set ly
the mass of disposable capital to the choice of an employment.
Credit creates no wealth : it only shifts it from one hand to
the other.
Keturning to our hypothesis of an isolated individual, it is
further evident that the remuneration of his labour is its
entire product: his wage is in proportion to the efficiency of his
labour; but this efficiency is confined ly the amount of his
1 The attacks of Macleod and Walker on the wage fund theory are based on
the conception that, through the instrumentality of credit, every limit set to
the expansion of industry, in respect of the amount of disposable capital.
vanishes, and that the pure and simple productiveness of labour deterniiin-s it-
remuneration. This appears to me one of the errors for which there is least to
be said. Walker, loc. cit. ; Macleod, Elements of Economics, vol. ii. chap. xiii.
§ 23, p. 126.
CHAP, v OF THE VALUE OF LABOUR 289
disposable capital within a narrower circle than that constituted
by the opportunities of employing his labour productively.
This principle may also be applied without difficulty to
the most complex economic problems of a civilised community.
Thus let us consider the case of gold-diggers, at the time of
the discovery of the gold fields in California or Australia.
With little capital or skill a common labourer was enabled to
obtain about a quarter of an ounce of gold in a day. The
immediate result was a great rise in wages, i.e. in the labourers
remuneration, determined by the efficiency of his labour in the
production of gold. Hence also : " the cost of obtaining any
commodity, that is the efficiency of the labour which produces it,
must regulate wages measured in that commodity!' 1 Even here
however it is obvious that the efficiency of labour continues
to be limited by the amount of disposable capital
The prospective productiveness of an undertaking does
not affect wages, unless the disposable capital is sufficient to
admit of the labourer waiting until the results are reaped.
If it is not, the prospective productiveness of his labour, even
though it should consist in the realisation of milliards, avails
him nothing : he cannot do what is necessary to gain the
milliards (i.e. work the requisite time), which for him are
inaccessible commodities, and do not therefore constitute his
wages. But within the limits of the amount of disposable
capital, the prospective productiveness of labour determines
wages, — only however as a maximum limit, as we shall see in
the sequel.
The labourer can only obtain the whole of the produce of
his labour, if he works without the aid of capital and natural
agents, or if he obtains gratuitously the use of these elements
of nearly every kind of production. Their gratuitous aid
however can only be obtained if their amount is altogether in
excess of the demand, so that no given portion has a final
degree of utility for any one ; whilst, on the other hand, their
aid becomes increasingly onerous, in proportion as the supply
falls short of the demand.
Now let us again suppose the case of two individuals, one
possessing capital and able to work, the other having no
1 W. D. M'Donnell, A History and Criticism of the various Theories of
Wages, Dublin, 1888, § 13, p. 67.
U
290 GENERAL THEORY OF VALUE PART in
capital, but able to perform more productive work than the
first.1 For Primus, let the final degree of utility of his
capital, as a direct commodity, be expressed by the index 10,
the final degree of utility of his labour without the aid of
capital be expressed by 3, and lastly let the productiveness of
his labour combined with capital be expressed by the index 21.
We should then have : ^ = 10 : ^ = 3 ; c + I = 2 1.2 Hence
in accordance with Gossen's rule, the final degree of utility of
Primus's labour, as a complementary commodity, is equal to
the difference between the value of the product of the com-
bination of capital with labour and the value of capital as a
direct commodity ; i.e. 12 =21 — 10 = 11. 3 Similarly we find a
value for the capital, as a complementary commodity, expressed
by c2 = 21 — 3 = 18. Now, for Secundus, let the final degree of
utility of his labour, unaided by capital, be expressed by an
index, say of 4, and let him be capable of producing, if
possessed of a capital equal to that of Primus, an amount
equal to 30. We should then have ^ = 4; Z -f<7=30;
and therefore, in accordance with Gossen's rule, C2 = 3 0 — 4 =
26 ; i.e. if Secundus does not obtain a capital, or is deprived
of the one he has, instead of earning 30, he will only earn 4.
It is therefore worth his while to pay for C2 up to a price
expressed by the index 26, in terms of the product. Let us
then ascertain the value of L2, i.e. the amount of the wage.
Primus, it must be observed, cannot give c2 in exchange
for less than 18, because otherwise it would be more ad-
vantageous for him to combine it with his own labour. On
the other hand, it is not to Secundus's advantage to pay more
1 Let us leave natural agents out of the question, assuming them to be so
abundant as to exceed the demand, but not so as to render labour superfluous.
2 It is, I trust, superfluous to observe that the sign + here does not indicate
addition, but technical combination of labour and capital. I have used c to
indicate capital, and I labour when they are combined, i.e. when they are
mutually complementary commodities ; c\ and li indicate capital and labour
considered separately as direct commodities ; c^ and 12 indicate capital and labour
considered as instrumental or complementary commodities, apart from each other,
i.e. severed from the combination c + I.
3 In fact, Primus, supposing him to be possessed of ci, will be disposed to pay
for labour equal to his own up to 11, seeing that by combining it, as a com-
plementary commodity with c he will obtain a total product of 21 ; otherwise,
if he loses his capacity to work, instead of earning 21 as before, he will only have
10. Therefore his loss will be equal to 11, and this is the value of his labour as
a complementary commodity.
CHAP, v OF THE VALUE OF LABOUR 291
than 26 for C9t because otherwise his labour would be re-
munerated by a smaller net return than he can obtain
without capital. Any price above 18 and under 26 will
suit the convenience of both parties to pay and to accept
respectively for the use of c2 or C2, and if the market is
restricted to these two individuals, there is no criterion to
determine the point the price for the use of Primus's capital
will reach, within these limits (part ii. chap. i. § 4).
If Primus is satisfied with 19, Secundus having a total
product of 30, and C2 having cost him 19, it follows that the
remuneration of L2 was 11, i.e. that the remuneration of his
labour was 11, because that is the product of his labour after
deducting the interest on the capital borrowed from Primus.
If Primus, on the other hand, succeeds in obtaining 25 for
the use of his capital, Secundus's wage is only 5 ; i.e. the
product amounts to 30, and from this must be deducted 25
for Primus, leaving a balance of 5 to Secundus in respect of
his labour.
If there happens to be a Tertius l in the same conditions
as Primus, so that the two compete with each other, Secundus
will certainly obtain his capital for 19, and his wage will in
no case be less than 11. If Tertius, by combining his labour
with his capital, can only obtain 15, the value of the capital
as a complementary commodity is represented for him by 1 5 —
3 = 12, and the price of the capital will oscillate for Secundus
between a minimum limit of 12 and a maximum of 18, and
the wage between a minimum limit of 11 and a maximum of
18. In fact, if he obtains the capital at the price of 12, the
1 The subjoined table may facilitate the comprehension of the case : —
2) l[
3)c +
= 10
= 3
1=21
1) C, vacant
2)Zi =4
3) (7+L = 30
ergo :
5)cl
= 11
ergo :
4) <72 =26
ergo :
>18
6) the price of (72
<26
ergo :
>4
7) Lz < 12
292 GENERAL THEORY OF VALUE PART HI
gross product he derives from it being 30, there remains to
him a wage of 18. If however he is obliged to pay 18, the
net product is reduced to 12, and that is the remuneration of
his labour.
It does not seem necessary to dwell further on this point,
since every possible case may be solved on the basis of Gossen's
law and of the general theory of value. It may be advisable
however to advert to two more hypotheses. Let us suppose
first that Tertius, instead of being provided with capital, and
thus entering into competition with Primus for the loan of
capital to Secundus, is a labourer and competes with Secundus
for the capital of Primus. Then, if Tertius is in the same
condition as Secundus, i.e. if his isolated labour produces 4,
whilst his labour combined with Primus's capital produces 30,
it is evident that the price of Primus's capital attains its
maximum limit, because each of the two labourers will outbid
the other until they reach the amount of 25. If either
offered 26, he would no longer derive any profit from the
capital. The latter can only be obtained by one of them, and
neither will give more than 25. This price will certainly be
paid, but which of the two competitors will obtain it cannot
be determined in general. If however we suppose, that the
final degree of utility of isolated labour is, for one of them, 3,
and for the other, 4, it is clear that most can be offered by
that one of the twain whose labour, without the aid of capital,
is least 'productive ; just as we saw in the theory of foreign
trade, that other countries are driven out of a neutral market
by the country which has the largest difference in its
comparative costs, i.e. by the one whose labour is least
productive.1
So too, if we suppose that one of the two individuals is
capable of obtaining from the combination of labour and
capital (7 + V), instead of 30, a larger product, say 35, the
price of the capital 2 will range for him between 2 6 and 3 0 ;
because up to 25 he will encounter the competition of the
individual who can only derive 30 from the combination of
the capital with his labour, i.e. of Secundus. But at the price
of 26 Secundus will be excluded from competing, as his net
1 Part ii. chap. iii. § 2.
2 The case is as follows (see foot of page 293) : —
CHAP. V
OF THE VALUE OF LABOUR
293
product would no longer show any increased profit. Tertius
however will still have to compete with Primus, for if he pays
between 26 and 30 for the capital, he will have a gross
product of 35, and hence a wage (\2) which may vary from
9 to 5. Here again the price of the capital (y9) between 26
and 30 will be undetermined.
From what has been stated it appears that the productive-
ness of labour, as a complementary commodity, is the maximum
limit of wages (i.e. of its remuneration), and that competition
may lower this limit to a level with that of the productiveness
of isolated labour, i.e. of labour unaided by capital. The
converse of this applies to capital, the maximum remuneration
of which is given by its productiveness as a complementary
commodity; but such productiveness may be cut down by
competition to the limit which is given by the final degree of
utility of the capital as a direct commodity. Now it happens
that under a system of divided labour, the labour of many
individuals sometimes loses every degree of utility as a direct
commodity, or as a commodity to be used singly, as each
individual's labour was adjusted only to serve as a com-
plementary commodity, and as each individual counted on
forming part of an economic organism. In other words, the
cost of reproduction of a wage, be it ever so small, may be
altogether absent for one whose labour can only be utilised as
a complementary commodity. This is also true of certain
forms of investment of capital.
A second possibility that may be mentioned is the follow-
ing: It not only may, but will frequently, happen that if
Primus and Secundus are joined by Tertius, either as a capitalist
Primus
ci =10
l! = 3
c + l = 21
Secundus
Ci vacant
la = 4
a+z=3o
Tertius
71 vacant
A! = 4
7 + X = 35
Value of the capital
if Tertius elimin-
ates Secundus.
Z2 =11
Cs =18
C2 =26
72 =31 (maximum)
•<n
72>25
>18
<?2
<26
If Secundus is
alone to com-
pete with Pri-
mus.
>18
72
<31
If Tertius is alone to
compete with Primus.
x<io
X2>4
Profit of the labourer
if he eliminates Se-
cundus and treats
with Primus.
294 GENERAL THEORY OF VALUE PART in
or as a labourer, instead of being compelled to choose between
the capital of Primus and that of Tertius, or between the
labour of Secundus and that of Tertius, the one may employ
both portions of capital, and the other both the labourers. In
fact, supposing Tertius to be a new capitalist, it may be that
Secundus's labour will become much more productive if aided
by double the amount of capital. If we said before that
his own unaided labour was worth 4 to him (L = 4), and
that with the assistance of Primus's capital it produced 30
((7 + Z=30), we may say now, for instance, that his labour
with the further assistance of Tertius's capital produces 80
(7 + C + L = 80), and we may suppose that the quantity of
capital supplied by Tertius is equal to that supplied by
Primus, so that we have 2 C+L= 80. Then it is clear that
if we carry our minds back to the moment when Secundus,
having nothing but his own labour that yields him 4, applies
for capital, he will be disposed to pay for 2 C any price up to
75, since the increased utility he derives from 2 C is equal to
80 — 4= 76. Primus will not part with his capital for less
than 18, 011 the above hypotheses respecting his position, and
Tertius will not part with his capital for less than 12.1
Hence the price of the sum of the two capitals may vary
between 30 (i.e. 12 + 18)2 and 75. If Secundus however
has already secured a first portion of capital, whether that of
Primus or that of Tertius, at a price between 12 and 18, say
15, the second portion of capital will only have for him a
utility measured by 50, for with (7 + Z he already realises 30
and obtains a net wage of 15, and with 2 C + L he would
only realise 50 more, his gross product being 80. Whilst
therefore 49 would be the maximum price for the second
1 The hypotheses were : —
Primus
Tertius
h
c +
= 10
= 3
Z = 21
7i
Xi
7 +
= 10
= 3
12 =11
Co =18
X2
72
= 5
= 12
2 Tertius will not part with his capital for a lower price than Primus reccivi-.-.
because Secundus requires both the capitals. If they combine, they may oblige
Secundus to pay 75 for the two together ; if however they compete with each
other, Secundus will obtain the capital of Tertius at a price between 18—
Primus's lowest price — and 12 — the lowest price Tertius can accept.
CHAP, v OF THE VALUE OF LABOUR 295
portion of capital, if Secundus had already obtained the
first, the minimum price thereof will be 12 or 18, according
as the first portion has been granted by Primus or by Tertius,
and its price may therefore vary between 12 and 49, or
between 18 and 49. We might also have supposed that a
fresh portion of capital would yield a less quantum of utility
than the first, that is we might have supposed the law of
decreasing productiveness to be in operation ; still the solution
of this problem would have been determined by the same
rules. The same reasoning would apply if Tertius were
supposed to be a labourer without capital, and Primus a
capitalist capable of employing both Secundus and Tertius
with a proportionately larger or smaller profit. The prin-
ciples above set forth contain the whole law of wages in
isolated economics. It remains for us to see their application
in social economics, and to guard against certain errors to
which those who study this point are liable.
§ 3. That Wages do not vary in Proportion to the Productive-
ness of Labour and are not independent of the disposable
Capital.
Some writers, overlooking the fact that labour is a com-
plementary instrumental commodity, have held that wages
must be exactly equivalent to that part of the product which
is due to labour, and that they are derived directly from the
latter. It appeared to them that, as the productiveness of
labour increases, wages must always rise in proportion, and
vice versa. From this they claimed to deduce two principles,
viz. : 1st, That wages are not paid out of capital ; 2nd, That
wages are derived directly from the produce of labour.
In view of what has been stated, and having regard to
the fact that labour is a complementary instrumental com-
modity, it is certain that, as its productiveness increases, other
things being equal, the TOTAL PRODUCT increases ; and vice versa,
as its productiveness decreases, other things being equal, the
total product decreases also. Thus, e.g., suppose Chinese
labour is only one-third as efficient as American labour, and
that the former is suddenly substituted for the latter in all
the workshops of the United States, the consequence will be
296 GENERAL THEORY OF VALUE PART m
a sensible decrease in the TOTAL PRODUCTION.1 But it would
be altogether a fallacy to conceive : 1st, That only wages would
necessarily diminish; 2nd, That they would decrease in pro-
portion to the diminished productiveness and vice versa.
Let us work out this problem in detail. Let the pro-
ductiveness of a Chinaman's isolated labour be expressed by
the index 4, that is ^ = 4. Let the productiveness of a given
quantity of capital taken by itself be expressed by the index
10, that is c1 = 10. Let the productiveness of a Chinaman
working with that capital be expressed by 21, that is,
c + l=21.
Then by severing the labour from the capital, 11 points
are lost, that is to say, a capitalist will be disposed to pay for
the Chinaman's labour, as a complementary commodity (l\ at
most 1 0 ; and the Chinaman will sell his labour for not less
than 5, since by working on his own account he produces 4.
The position may therefore be denoted by the following
equations : —
1) d = 10
2) J1 = 4
3) C + 1--21, ergo :
4) Ja=ll
5) Cg = 17, ergo :
6) Price of l, or between 5 and 10.
7) Price of c, or between 11 and 16.
Now let us proceed to consider the case of the American
labourer. Let us again suppose isolated capital to be worth
10, i.e. Ca=10; let the isolated labour of the American be
1 This theory is not quite the same as the one stated and maintained by
Professor Marshall. It must be observed that his argument is based on a
supplementary hypothesis, which deserves attention. He says: "If the effici-
ency of labour could be suddenly doubled, whilst the capital of a country
remains stationary, there would be a great and immediate rise in real wages.
The supplies of capital already in existence would be distributed among the
labourers more RAPIDLY than would otherwise be the case, and the increased
efficiency of labour would soon make good the diminished supplies. The fact
is that an increase in the efficiency of labour would bring about an increase in
the supply of capital." Professor Marshall, it will be observed, makes the
hypothesis that there are reserves of capital, whether in the form of riches that
would not have been used as capital but for the increased efficiency of labour,
and the consequently increased remuneration also of capital, or in the form of
real capital, but which is slower in being offered (i.e. of participating in the
CHAP, v OF THE VALUE OF LABOUR 297
three times more productive than that of the Chinese, i.e.
^ = 1 2 ; let the total product of the same capital which was
disposable for the Chinaman, joined to the American's labour,
be thrice as much as before, that is, C + L=Q3. On these
hypotheses, the capitalist will be disposed to pay the American
labourer not more than 52, for to dispense with his co-operation
means the loss of a net profit of 53 ; whilst the labourer in
turn will not agree to work for less than 13, since he can
earn 12 without the capitalist; nor would he pay more than
50 for the aid of the capital, for if he obtains it and thereby
succeeds in realising a gross profit of 63, only 51 points will
represent the product added to that of his isolated labour.
The equations will therefore be : —
2) L = 12
3) £+L = 63, ergo1
4) Lz=53
5) 02 = 51, ergo:
6) Price of labour as a complementary commodity, i.e.
2' that is Between 12 an(* 53-
Now, the Chinaman's wage ranged between 5 and 10,
and the American's was to have been three times as much,
in respect of his treble productiveness. But what has
become of that ? The American may indeed be paid 1 3 or
14 where the Chinese is paid 10, or 52 where he gets 5;
this will depend entirely and exclusively on the conditions of
demand and supply, that is on the laws of value already ex-
plained, and on the existence and nature of competition with
the labourer or the capitalist.1
demand for labour) than it would otherwise have been. This observation is
valuable in applied economics, but it has no place in pure economics. In the
latter the whole amount of capital is offered with the greatest promptitude,
and there is no reserve or storehouse from which more can be drawn at a
given moment, nor can it be turned over more rapidly than it happens to be
turned over. Capital limits industry.
1 Professor Marshall, to whom this criticism does not apply, takes the same view.
In fact he says : "The new doctrine shows how their wages depend not only on
tlie capital which others have stored up, but also, and to a greater extent, on the
efficiency of their own work." And in a note : "On the other hand Professors
Jevons, Cliffe Leslie, Hearn, and Francis Walker, and Mr. Shad well have all
adopted the same general idea that icages are the share of the produce which THE
LAWS OF SUPPLY AND DEMAND enable the labourer to secure" — Marshall, Economics
298 GENERAL THEORY OF VALUE PART in
It might therefore have happened that whilst the Ameri-
can's isolated productiveness was three times as much as that
of the Chinese, the productiveness of his labour, as a comple-
mentary commodity, was only double, or on the contrary that
it was, say, five times as much ; and it is in accordance with
this last productiveness that the MAXIMUM * limit of wages varies,
whilst the MINIMUM limit varies as the first.
The illusion that the sequence is other than the above
is arrived at by a method of reasoning somewhat like the
following : —
" Wages are drawn from the produce of labour, and the
maintenance and the payment of this labour do not even tem-
porarily trench upon capital. Supposing a hundred men to be
landed without any stock of provisions in a new country.
Will it be necessary for them to accumulate a season's stock
of provisions before they can begin to cultivate the soil ?
Not at all. It will only be necessary that fish, game, berries,
etc., shall be so abundant that the labour of a part of the
hundred may suffice to furnish daily enough of these for the
maintenance of all, and that there shall be such a sense of
mutual interest, or such a correlation of mutual desires, as
shall lead those who in the present get the food, to divide
(exchange) with those whose efforts are directed to future
recompense. To take another instance, suppose a number of
workmen engaged in building a ship, which it will take two
years to finish, and that their wages are paid by the entre-
preneur weekly, i.e. long before the ship is completed. Here
too, it is argued, the wages are not drawn from the entre-
preneur's capital, but from the produce of the workmen's
labour, because before payment of each week's wages his
capital has been increased by that part of the ship which has
been built during the week ; so much so that if he were to
sell the unfinished ship as it stands, he would expect to get
back his outlay plus a profit. Consequently the workmen
have increased the entrepreneur's capital before they receive
of Industry, iii. 6, § 4, p. 205. Walker says expressly: "In saying that pro-
duction furnishes the measure of wages, it is, of course, not to be understood that
wages equal the product of industry." — Walker, Political Economy, p. 381.
Leroy-Beaulieu maintains that wages are regulated in accordance with the pro-
ductiveness of labour. Le travail dcsfemmes, etc., 1873 ; Repartition des richesses,
1881 ; L'&tat moderne, p. 341, note, 1891.1
CHAP, v OF THE VALUE OF LABOUR 299
any salary from him, and what they get is a part equal to the
increase of capital they have given." 3
Now, as regards the instance of the hundred men who
settle in a new country, it is clear that as nature has supplied
a stock of direct commodities, no capital is necessary to carry
on any labour, and the hundred workmen find themselves in
the position of a hundred individuals backed by a great altru-
istic capitalist. We might just as well suppose that nature
had been more generous still, and had furnished us with so
many direct commodities as even to render all labour un-
necessary for the enjoyment of every commodity we can
imagine.
Wages therefore are independent of capital only when
they are derived from the prodigality of nature; and the rule
is that this prodigality does not exist, and that where it does
exist, it soon disappears.
What do settlers in a new country live on where nature
does not spontaneously provide their maintenance ? What do
the crew of a ship live on when the latter is six months out
at sea ? Can more land be sown in one year than the amount
of corn that has been garnered for the purpose admits of ? It
is in this way that the disposable capital limits industry and
wages. As for the second instance, it is quite untrue that the
work done by the labourer during the week is the equivalent
of his wage. In fact, to begin with, it is not an equivalent' as
regards himself ; so much so that he is anxious to exchange
his labour for wages, and would rather give his labour and
receive wages, than keep his labour and receive no wages.
Besides, the entrepreneur cannot sell the unfinished ship to
whatever individual, so as to recoup his expenditure and obtain
a profit. That may be the case, if he finds another entre-
preneur who wants the unfinished vessel in order to complete
it ; but if he does not, then the unfinished ship is worth less
than the timber with which it is built, and the wages paid are
lost to the entrepreneur. And even if the ship were finished,
it remains to be seen whether it can sail, and if so, whether it
1 This reasoning is so puerile that I should not have ventured to reproduce it,
but for the fact that it is put forward by Mr. Henry George in his Progress and
Poverty, 5th ed., Kegan Paul, 1883, pp. 15-81. Also by the same author : Social
Problems, Kegan Paul, 1884, pp. 170-194.
300 GENERAL THEORY OF VALUE PART m
will find passengers and goods to carry. Until all this has
happened, and it may not happen, the entrepreneur has no equi-
valent for the wages paid for the labour expended on the ship.1
The truth as regards the productiveness of labour in pro-
portion to wages, is rather this : the productiveness of labour
is one of the factors of the amount of the total product, just
as capital is, and the division of the total product between
capitalist and labourer is effected in strict accordance with the
laws of value, so that a larger total product, whether it be due
to the increased efficiency of capital, or the increased pro-
ductiveness of labour, is apportioned independently of the
fecundity of either labour or capital ; so that it may be that
the remuneration both of the capitalist and of the labourer
will be increased, but it may equally well be that only the
remuneration of the one will increase, that of the other re-
maining stationary ; and it may also be that the remuneration
of one will be less than formerly, and that of the other be pro-
portionably increased.2
Hence we must not even exclude the possibility that, the
total product remaining the same, the remuneration of one
only of the two factors increases, whilst that of the other
diminishes.
In fact the division of the product is effected within the
limits of price that are obtained by dividing it, according to
Gossen's rule, exclusively in accordance with the curves of
reciprocal demand. It depends therefore on the quantities
offered by either party, and on the scale of wants of either
party for successive portions of the other's commodity.
1 "W. H. Mallock, Property and Progress, or Facts against Fallacies, London,
1884, pp. 18-37. Mr. Mallock's work is a complete refutation of Mr. Henry
George's theories.
2 It is easy to suggest an instance in which, notwithstanding an increase in
the productiveness of capital and labour, whether considered severally or jointly,
we may have a smaller wage than before. In fact, suppose the insulated values :
C! = 20; Ji = l ; and the conjoint values: c + l = 38 ; then labour, as a com-
plementary commodity, has a value of 18, for if we suppose it to be taken away
from the capitalist, he loses 18, and is left with 20 instead of 38 ; therefore
Z2 = 18, and for the same reason ^ = 37. Now let us suppose the insulated
productiveness of capital and labour to be increased, so as to make c\ = 25 and
Zi = 10, and their conjoint productiveness to be increased so as to make
c + Z = 40 ; that will give for Z2 the value of 15 and for % the value of 30. There-
fore : whilst in the first case the wage, i.e. the value of 12, must be more than 1
and less than 18, now it must be more than 10, but less tJum 15.
CHAP, v OF THE VALUE OF LABOUR 301
§ 4. Determination of the Rate of Wages under Conditions
of Economic Statics
Let us suppose any economic situation of a close market
rendered sufficiently lasting to admit of its being examined ;
or in other words, let us suppose the economic relations
prevailing, at a given moment, in a close market to be
rendered invariable, and let us ask ourselves, on what factors
wages will, for the time being, depend there. Moreover, let
the hypotheses be realised which we have already shown to be
the premisses of every pure theory of wages, and in particular,
let the labourer be exclusively a labourer, and not a capitalist
as well.
In that case, we shall have on the one hand capitalist-
entrepreneurs who dispose of a given quantity of direct
commodities and of instrumental commodities of diverse kinds,
and on the other a number of labourers destitute of such
commodities. The quantity of direct and instrumental com-
modities in the hands of the capitalists is the only existing
supply, and it is of definite magnitude. No future event, fore-
seen or unforeseen, can affect the quantity of wealth now
available, i.e. it cannot exercise a retroactive influence ; it is
at the present moment what it has been made by the
economic forces of the past. Nor can any condition that has
subsequently affected the minds of the owners exercise any
influence on the amount of wealth available at a given
moment : whether they desire it to be more or less, to dissipate
it or to hoard it up, to employ it or to give it away, the
amount of disposable wealth will, in each case, be, for the
time being, a fixed quantity, and any possible variation in it
can only be a future matter.
The causes which determine that wealth, at a given time
and place, should be of a given amount, may easily be
assigned. They are the same that determine the extent
of production in a given environment ; and the division of
the wealth actually possessed into direct and instrumental
commodities (raw materials and instruments properly so
called) likewise depends on known causes, viz. on the nature
of the kinds of products hitherto produced, on the methods
302 GENERAL THEORY OF VALUE PART in
pursued in the process of production, and on the purposes for
which the production has been carried on. In any case, all
these causes belong to the past and have developed a present
state of fact.
Now, supposing that at the present moment we have to
do with individuals animated exclusively by hedonic aims,
the disposable wealth, in so far as it consists of direct com-
modities, will be divided into two parts : one intended to
satisfy present wants, which we shall term a fund for unpro-
ductive consumption ; the other intended to satisfy prospec-
tive wants, and which we may designate as, in part, real
capital, and in part a reserve and insurance fund. Two
factors will determine the proportion in which this division
will be made, viz. on the one hand the estimate of the plea-
sure afforded by the immediate enjoyment of the stock of
direct commodities, as compared with the estimate of the
pleasure afforded by the future possession of probably greater
wealth, or the insurance against pains apprehended in the
future ; and on the other hand, a knowledge of the means of
making profitable investments under present conditions of fact.
The first factor will in turn vary according to a number of
circumstances, which may be summed up by saying, that on
the knowledge, the wants, and the character of the several
individuals must depend the judgment they will form as to
the measure in which present or remote wants are to be
respectively preferred ; and the second factor may again be
decomposed into other factors, since it depends on the environ-
ment, the technical knowledge, the speculative tendencies, the
aptitude for work, and the mass of capital and labour on
which the calculations are based, whether there is a larger or
smaller field of profitable investment.
We are thus forced to recognise that the disposable capital
is a quantity predetermined, at all times, by economic causes,
i.e. by conditions of fact partly physical, partly intellectual
and moral. In this sense the disposable wealth is pre-
determined; the parts thereof consisting of raw materials
and instruments on the one hand, and direct commodities on
the other, are predetermined ; and so too are the portions into
which this mass of direct commodities is divided, under the
respective names of fund of unproductive wealth, reserve (or
CHAP, v OF THE VALUE OF LABOUR 303
insurance) fund, or hoard, and capital fund. Among the
causes that predetermine this distribution the past and pro-
spective fecundity of the labourer's work figures repeatedly.
In particular, the so-called " field of profitable investments "
depends, in addition to other factors, also on the prospective
efficiency of such work, and, in so far as such efficiency
depends in turn on the character or physical qualities of the
labourer, on these factors as well ; and the past fecundity of
labour has exercised its influence on the total mass of dis-
posable wealth, and on the division of such wealth into raw
materials and instruments on the one hand, and direct com-
modities on the other. It is therefore certain that, accord-
ing as in the supposed close market Chinese or British labour
is, or is expected to be, available, the disposable capital fund
is different. But given this fact, it has a determinate
magnitude.
Now this disposable capital, predetermined in the manner
already expounded, constitutes the entrepreneur- capitalists'
demand for labour, i.e. their offer. Their demand for labour
is limited by the capital at their disposal, and according to
the price of this labour they will take more or less. But
given the quantity of disposable capital, and a number of
labourers for whom each portion of capital has a determinate
degree of utility, the price is a mechanical result, just like
that of any other commodity, given the quantity and the
demand, i.e. the law of demand (part ii. chap. ii. §§ 1, 2).
We may conceive the capitalist as disposed in conformity
with Menger's table, i.e. we may assign to each capitalist
a series of degrees of utility denoting the price he is ready
to pay for a first, a second, a third workman, and so on.
This scale of degrees of utility of successive labourers for
each capitalist is given by the degree of utility he attributes
to successive portions of his capital in combination with
labour, also in various quantities.1 Given the number of
labourers, these will be distributed among the capitalists pre-
cisely as in the instance given in discussing the formation of
prices in Menger's table.
The theory expounded above is termed the wage-fund
1 We shall have curves of demand the general equation of which will take
the form : y=fl (x, z), and sometimes y=fl (x, z, a).
304 GENERAL THEORY OF VALUE PART in
theory, and is substantially due to the two Mills, and in a
still larger measure, but subject to some slight modifications,
to Cairnes.1 It constitutes an exact law for the determina-
tion of the rate of wages under conditions of economic statics.
§ 5. So?7ie unfounded Objections to the Wage-Fund Theory
1st. The wage-fund theory maintains that wages are
always and necessarily paid out of capital. Now, this is
sometimes the case ; but it also happens sometimes that
entrepreneurs do not pay their labourers until the work is
completed, and give them at most an instalment drawn from
their capital, the balance of the remuneration being paid out
of the finished product.2
Now with reference to this objection, is it not evident
that, if it does happen that labourers are paid with a
portion of the product, they are not engaged a forfait or
per aversionem by the entrepreneur, but are partners with him
1 Cairnes, Leading Principles. "Aussi longtemps que la societe peut
deplacer son capital abstrait d'une forme d'investissement a une autre, toutes
les unites ont la meme importance, et pour toutes on paiera le meme taux.
Precisement le meme principe est vrai dans le cas du travail ; les operations
necessities par 1'utilisation d'une serie d'instruments sont aussi differentes les
unes des autres que peuvent 1'etre les instruments eux-memes. Neanmoins si
1'energie du travail est libre de passer d'une forme a une autre, il sera retribue
sous toutes ses formes a un taux uniforme. Supposons que notre petite com-
munaute s'accroisse en nombre, et que ses membres se consacrent a differents
metiers, celui qui manie la hache, pourra-t-il obtenir des salaires plus elev£s
que celui qui se sert des couleurs ? Assurement non, si 1'unite du travail peut
passer d'une forme a une autre aussi librement que le capital. Ecartons le
bucheron : quelqu'un autre des nouveaux travailleurs qui entre dans le champ
de 1'industrie prendra sa place au lieu de se joindre aux ouvriers peintres, et le
resultat final pour la communaute ce sera qu'elle devra se passer d'une unit6 de
ce dernier genre de travail. Dans les conditions que nous-avons supposees,
toutes les unites de travail doivent avoir la meme utilite effective et toucher
une meme remuneration qui, dans chaqiie cas, sera mesuree par 1 'importance de
la moins necessaire des di verses operations que le travail doit accomplir."-
J. B. Clark, Revue decon. pol., 4e annee, No. 3, pp. 263, 264.
2 This objection, like all the rest in this paragraph, is taken from Mr. F.
Walker's criticism of the wage-fund theory. He concludes thus: "It would
be brutal to inflict further blows upon a body so exanimate as the theory of
the Wage fund." Let the reader judge whether these criticisms shake the
theory, or whether they do not rather show that the critics ignore the premisses
and misunderstand the conclusions.
CHAP, v OF THE VALUE OF LABOUR 305
as regards the profits and losses, and that what they receive,
on the completion of the product, is no longer wages ?
If a labourer can afford to await the completion of the
work before obtaining his remuneration, he is possessed of
capital, and this forms part of the wage fund. Such a case
may occur, and frequently does occur in real life ; but it does
not conflict with a theory one of the premisses of which is
that the workman is destitute of capital}
2nd. The entrepreneur employs his capital with a view
to a profit, and the fact that he has a fund of disposable
wealth is not by itself an inducement to him to use it for
the purpose of production, just as the fact that a labourer has
arms and legs is no reason why he should use them to work
with. But if the profit expected is the cause of the trans-
formation of disposable wealth into capital, it at the same
time determines its amount, and therewith the amount of the
wage fund.
This is so ; but has anything been said to the contrary in
the wage-fund theory ? We have only added that, given an
opinion as to the productiveness of capital and labour, at a
given time and place, the wage fund is a predetermined sum.
3rd. If a capitalist lacks an adequate wage fund, and has
confidence in the productiveness of 'a quantity of capital and
labour, he will procure the requisite capital by means of credit,
or he will pay the labourers themselves provisionally with
promises of payment which he is to redeem when the works
are completed and the profits have been realised.
To enable the entrepreneur to procure, by means of credit,
the capitals he requires, it is necessary that these should exist
in other hands ; hence, if given to him, they are taken from
some one else ; and in a market including the lender and the
borrower it will always be the disposable mass of capital that
will limit the amount of real wages it is possible to pay.2 If,
on the other hand, the entrepreneur pays provisionally by means
of promises of payment, we are again confronted by a case in
which the labourer is himself also a capitalist.
1 " The typical labourer' is one who has not accumulated any considerable
amount of wealth for himself, and must therefore depend for his support upon
the capital of others who pay him for his services." — S. Newcomb, p. 436.
2 The wage fund presupposes a close market ; but in a close market credit
cannot increase the disposable capital.
X
306 GENERAL THEORY OF VALUE PART in
4th. An increase in the number of labourers does not
necessarily reduce the wages, though in accordance with the
wage-fund theory this should be the case, because the divisor
increases whilst the dividend remains unchanged. An increase
in the number of labourers may cause to become operative the
law of increasing productiveness, as it may also have the
opposite effect.
If it is expected that the supposed increase of labourers will
augment their productive efficiency, this expectation belongs
to the numerous class of causes that may affect the efficiency
of labour, and it will have been taken into consideration in
determining the respective proportions of the fund of unpro-
ductive consumption, reserve fund and capital ; just as the
opposite fact, if anticipated, will have operated to determine
the wages. But if it has not been anticipated, it is incon-
ceivable how it can, for the time being, have any influence on
wages : in that case either the capitalists will have made a
good bargain, and the labourers a bad one, or vice versd. They
will have learned a lesson for the future : that is all.
§ 6. Determination of the Rate of Wages under Conditions of
Economic Dynamics
Economic quantities may be considered under two aspects :
as a fund, and as a flow. So many gallons of water con-
tained in a tank are a definite conception, and so many gallons
of water per hour flowing in and out of a reservoir constitute
an equally definite conception. There is no necessary relation
between the magnitude of a fund and that of a flow, for we
may have a large fund with a small flow, and a small fund
with a large flow ; hence any indication of quantity is am-
biguous which does not define both terms. A fund therefore
is " a sum of values considered irrespectively of every other
circumstance " ; and a flow is " a sum of values considered in
its transit through some position we are considering, and in
relation to a determinate unit of time." l
The above distinction is well known with reference to the
theory of money : the quantity of money existing in a country
1 Simon Newcomb, Principles of Political Economy, New York, Harper,
1886, pp. 316, 321, 325, 408, 428, and 434.
CHAP, v OF THE VALUE OF LABOUR 307
may be considered under a twofold aspect, viz. either with
reference to its volume pure and simple, i.e. as the sum of the
existing monetary units ( = fund), or as a flow, i.e. as the fund
multiplied by the rapidity of its circulation within a deter-
minate time. Now the capital which remunerates labour is a
flow and not a fund. In fact, if the entrepreneurs' capital were
not continually made up again by the proceeds of production,
it could only serve once for the payment of wages. Capital
consists of direct commodities that are absolutely consumed by
industrial processes, i.e. they are transformed into substances
destitute of the utility that human labour had conferred on
them, and cannot serve twice over for the maintenance of the
labourers. If we suppose, that under an economy of divided
labour and of exchange, the industrial production of a country
were technically so ill-directed that the sum of utilities pro-
duced were less than that of the utilities consumed, the wage
fund would go on decreasing until it vanished altogether,
whilst, on the opposite hypothesis, it would continuously in-
crease. Therefore supposing a society of egoists, of sufficient
average intelligence not to blunder in their anticipations as to
the result of industrial undertakings, it is recognised that the
capital of the entrepreneurs functions simply as an intermediary
between the labourer and the last consumer of the direct com-
modity that is produced. The length of time during which, in
various industries, the entrepreneur or capitalist advances wages
on behalf of the last consumer differs largely ; but considering
the industrial process in its normal aspect, we have always to
do with a mere advance ; for each successive productive opera-
tion a new capital is required, and this must be furnished by
the consumer out of the proceeds of his own production. In
this way the law of wages in social economics, and under a
regime of divided labour, corresponds with that which was
formulated for a supposed state of isolated economics ; nor
could it be otherwise. As the theory of wages under static
conditions deserves the name of Cairnes's theory, so that which
presents itself under dynamic conditions deserves the name of
Hermann's or Newconib's theory.1
1 F. B. "W. Hermann, Staatswirthschaftliche Untersuchungen, p. 473 ; New-
comb, I.e.
INDEX OF AUTHORS
Ackermann, 16
Anderson, 78, 275
Antonelli, 79
Auspitz, 79, 197
Austin, 14
Bagehot, 8, 11, 218, 247, 259, 287
Bain, 7, 14, 41
Baker, 14
Barone, 193, 280
Bastiat, 225
Bernouilli, 78
Besta, 68
Block, 52
Bohm-Bawerk, 63, 79, 92, 130, 140,
169, 216, 251, 252, 253, 255
Bordas, 78
Bosanquet, 232
Bourlamaqui, 78
Brigauti, 6
Buffon, 78
Cairnes, 8, 11, 143, 166, 171, 174, 179,
181, 185, 197, 238, 258, 259, 266,
273, 287, 304
Carey, 25, 169
Cherbuliez, 270, 272
Chevalier, 223
Cheysson, 156
Clark, 62, 258, 304
Clement, 111
Cogliolo, 14
Cognetti de Martiis, 245
Condillac, 78, 101
Courcelle Seneuil, 127, 248
Corn-not, 94, 149, 153, 159, 197
Davanzati, 100
De Morgan, 7
De Viti de Marco, 231, 237
Donisthorpe, 127, 137, 159
Drobisch, 7, 119
Dupuit, 28, 78, 91, 114, 136, 155
Edgeworth, 7, 119, 281, 287
Engel, 113
Faucher, 53
Ferrara, 25, 62, 127, 129, 143, 169,
218, 225, 271
Fisher, 128
Foville, A. de, 113
Gabelli, 13
Galiani, 78, 90, 96, 100, 230
Geddes, 3
Genovesi, 11, 78, 95
George, Henry, 299, 300
Giddings, 244
Gide, 279
Giffen, 113, 119
Gioja, 15, 103
Goschen, 242
Gossen, 28, 31 and foil., 38, 46, 78,
79, 85, 107, 109, 129, 132, 133, 221,
222
Gournerie, J. de la, 156
Graziani, 79
Gresham, 233, 234
Hearn, 16, 257, 297
Heliflholtz, H. von, 6
Helvetius, 11
Hermann, 16, 42, 98, 307
Herrenschwand, 275
310
PURE ECONOMICS
Jennings, 28, 50, 64, 78, 96, 102, 107,
170
Jevons, 6, 7, 36, 46, 78, 94, 107, 109,
119, 126, 129, 132, 136, 140, 150,
166, 197, 224, 233, 248, 251, 253,
257, 260, 297
Johannis, A. de, 12, 140
Jones, 273
Juglar, 236, 237
Keynes, 7, 8
Kirchmann, Von, 14
Knies, 223, 252
Lagrange, 6
Laplace, 78
Launhardt, 77, 92, 132, 161, 255
Lehr, 119
Leroy-Beaulieu, 113, 257, 298
Leslie, Cliffe, 185, 297
Lexis, 11
Loria, 12, 77, 78, 169, 266
M'Culloch, 100
M'Donnell, 289
Macleod, 236, 242, 244, 247, 252, 288
Maitland, Earl of Lauderdale, 111
Majorana senior, 169
Majorana, G., 169
Mallock, 280, 300
Maltlms, 4, 100, 275
Marshall, 76, 78, 79, 126, 128, 141,
145, 149, 155, 161, 186, 188, 190,
192, 195, 197, 200, 202, 204, 207,
209, 278, 287, 296, 297
Martello, 62, 127, 225
Maupertuis, 5, 6, 14
Menger, 8, 46, 79, 85, 94, 98, 132, 140,
143, 159, 161, 215
Messedaglia, 74, 222, 227, 229, 260
Mill, James, 102
Mill, J. S., 11, 14, 65, 81, 143, 165,
174, 197, 224, 227, 229, 230, 234,
244, 250, 259, 260, 262, 278, 285,
287
Minard, 78
Minghetti, 271
Moleschott, 116
Mougeolle, 16
Nazzani, 278
Neri, 129
Neumann-Spallart, 113
Newcomb, 305, 306
Ortes, 6, 25, 85, 92, 96, 244, 245, 275
Paolini, 247
Pareto, 71, 79, 128, 132, 133, 155, 186,
274, 280
Pay en, 116
Perry, 174
Piperno, 231
Price, Bonamy, 114, 267
Quetelet, 78
Regalia, 6
Ricardo, 37, 78, 130, 143, 155, 174,
188, 197, 231, 232, 234, 269, 272
Ricca-Salerno, 258
Ricci, 275
Rogers, 244, 273
Rossi, 137, 141, 169
Saint Robert, 116
Sax, 62, 253
Say, 111, 153, 272
Schaeffle, 278
Scheibner, 260
Schroder, 7
Senior, 25, 100, 161, 170, 185, 238
Serra, 275
Shadwell, 244, 273, 287, 297
Sidgwick, 14, 18, 28, 77, 82, 114,
227, 230, 237, 252, 258, 260, 262,
265
Smith, Adam, 244, 250, 269
Smith, J. P., 153
Soetbeer, 113
Spencer, 15, 17, 22, 55, 84, 232
Symes, 179
Venn, 7
Verri, 6, 15, 23-26, 78, 103, 123
INDEX OF A UTHORS
311
Wagner, 95
Walker, 225, 230, 232, 278, 287, 288,
297, 298, 304
Walras senior, 98
Walras, L., 7, 78, 79, 91, 132, 133,
148, 155, 156, 197, 253
Wicksteed, 36, 91, 109, 132, 148, 196
Wieser, F. von, 65, 79, 85, 92, 182,
184, 215, 218, 260
Wolkoff, 270
Wundt, 7, 14
Zuckerkandl, 79
INDEX OF SUBJECTS
Abstention, 52
Altruism, 10, 18
Amount-index, 188
Angular magnitude, 124
Auctions, English and Dutch, 145
Average, 227, 260
Bank notes, 239
Capital, 84, 93, 227, 243 and foil., 289
and foil., 295
Capitalisation, 259, 260
Certainty and uncertainty of events,
88-90
Commensurability, 23
Commodities, actual, 86
available and unavailable, 66-70
complementary, 81 and foil., 214,
248, 265, 290, 296
correlative, 82
direct, 56, 81 and foil., 94, 115,
214, 265
future, 69
genetic group of, 93, 182-184
imaginary, 62
instrumental, 56, 81 and foil., 93,
115, 184, 213 and foil., 222, 248,
265, 336 and foil,
material, 62-64
primary and secondary, 95
prospective, 86, 252, 280
Common denominator, 224
Competition, free, 159, 178
industrial and commercial, 197
Consumer's rent ; see Utility, residual
Correlation of cause and effect, 65, 83,
213, 218
Cost, 24, 99, 101 and foil., 170, 179,
186, 188
comparative, 174, 177
of money, 238
of reproduction, 143, 166 and foil.
Credit, 239, 288
Crises, 114, 184, 208, 234
Curves of first exceptional case, 200-203
of normal case, 200-203
of reciprocal demand, 197 and foil,
of second exceptional case, 205
of the rate of interchange, 124,
126, 131, 135, 137, 139, 141,
152, 156, 191, 193-195, 199,
202-205, 207
positive and negative, 30, 73, 159
Debased coinage, 232
Decrease of enjoyments, 28, 49, 95
Definite proportions, 81 and foil., 256
Degrees of enjoyment, 41 and foil.
Degrees of utility, 70 and foil., 95-109,
129, 148, 160, 164
final, 46, 74 and foil., 106, 109,
129, 133, 142, 170 and foil., 182
initial, 72, 73
Demand, 42, 96, 101, 148
law of, 148, 164 and foil., 227,
228
reciprocal, 197 and foil.
Desire, 40, 41
Discount, 18, 227, 235 and foil., 262
Distribution of money, 233
of quantity disposed of, 147-163
of utility produced by concomitant
causes, 65, 83, 213
problem of, 83
Division of labour, 189, 222
314
PURE ECONOMICS
Economic actions, 39
equivalents, 93
laws, 4
Egoism, 9-16, 20-23
Entrepreneur, 278 and foil.
Environment, 15, 16, 55
Equation between supply and demand,
166
Equilibrium, stable and unstable, 188
and foil.
Exchange, 241
Exchangeability, 99
Exchange-index, 206
Exchange power, 127
Flow, 306
Foreign trade, 173 and foil., 197 and
foil.
Future events, 27, 87
Gold point, 241
Gossen's rule, 218, 252, 256, 290
Gresham's law, 233
Hedonic premiss, 3, 7, 9, 10, 12, 16,
18, 19
Homo ceconomicus, 21, 22, 41, 45, 86,
89, 97, 156
Indifference, law of, 150, 160, 217, 266
Initial enjoyments, 32, 33
Instrument of exchanges, 221 and foil.
Insurance, 247, 249, 258
Interest, 213, 227, 242 and foil., 255
and foil.
Labour, 102, 104, 106, 284 and foil.
Land, 264 and foil.
Legal tender, 226
Malthus's law, 275
Markets, 53, 164
close, 179, 197, 305
Marshall's theorems, 188-209
Menger's table, 150, 157
Mill's theorems, 244
Minimum of action, 5, 39, 226
Money, 76, 77, 213, 221 and foil.
Monometallism, 225
Monopoly, 147-153
Ortes's rule, 92, 265
Pleasure, 3-17, 23-28, 32-38, 40, 103
Premisses of fact, 3, 18, 19, 28
Preservation of the species, 15, 16, 41
Price, 123, 147-164, 175-179, 236, 269
Productiveness, law of increasing and
decreasing, 186, 191, 266
simple and repeated, 90, 91
of capital, 250
of labour, 294
Profit, 213, 263, 278 and foil., 283
surplus, 268, 270, 272, 278
Progress of economics, 5
Rapidity of circulation, 231
Rate of interchange, 138-146
interest, 247, 259, 260, 261
wages, 286, 287 and foil.
Reflex actions, 39
Relativity of sensations, 17
Remuneration, 24
Rent, 213, 265 and foil., 275 and foil.,
282
Ricardo's law of rent, dynamic theory
of, 275
historic theory of, 277
statical theory of, 265
Savings, 247, 249
Scale of intensity, 48 and foil.
Sensation, common and special, 49
State, 22, 23
Time, 251, 252 and foil.
Trigonometric tangent, 124
Utility, actual, 86, 92
alternative, 215
comparative, 129, 133, 143, 161,
177, 189
complementary, 81 and foil,
correlative, 82
direct, 81 and foil.
INDEX OF SUBJECTS
315
instrumental, 81 and foil., 91, 94,
181, 213
integral, 74
positive and negative, 79 and foil.,
107
prospective, 86, 93
residual, 25, 76, 136, 156
total, 70 and foil., 81, 92, 107,
131, 155
vicarious, 214, 216
Value, 8, 25, 100, 115, 118, 123 and
foil., 128 and foil., 147 and foil, 159
and foil., 181 and foil., 188 and foil.,
2,13 and foil., 227, 235, 262, 264,
287 and foil.
general law of, 123
special laws of, 213 and foil.
Wage-fund, 303-306
Wages, 213, 281, 284 and foil., 287
and foil., 295 and foil., 301 and foil.,
306 and foil.
Wants, 39 and foil., 48 and foil., 53,
55, 60, 86
elasticity of, 52
variety of, 55
Wealth, 98, 110 and foil.
Wieser's law, 184, 251
THE END
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